Key takeaways: Hyperscale cloud providers continue to spend heavily on artificial intelligence, investors are waiting for huge future returns, and pressure on the giants' own core businesses keeps intensifying.
Among these companies, only Microsoft (MSFT) still maintains positive free cash flow, but its cash generation capacity has fallen sharply for a second consecutive quarter.
This earnings season, Wall Street is worried about the future profitability of tech giants' AI investments, and related company shares have been sold off.
Tech giants are collectively placing trillion-dollar bets: they hope large-scale infrastructure spending will buy profit growth for years to come. But all of this remains at the expectation level. For now, they can only rely on traditional main businesses — online advertising, enterprise software, e-commerce and others — to provide the funding ammunition for their grand AI plans.
This quarter's earnings show that these core businesses face new pressure and are also facing an early major test: whether companies can withstand long-term, high-intensity capital expenditure.
Meta Platforms, Inc. (META), following Google parent Alphabet (GOOG) and Amazon.com (AMZN), also recorded negative free cash flow; at this point, among the five major hyperscale cloud providers, only Microsoft still maintains positive free cash flow. Meta Platforms, Inc.'s free cash flow was negative $2.12 billion; Amazon.com's net cash outflow widened to $42.4 billion; Alphabet reached $9.07 billion. Microsoft's cash creation capacity fell sharply for a second consecutive quarter, down 27% this quarter to $18.63 billion. Microsoft also said it will continue issuing bonds to further increase AI infrastructure construction.
Over the past two weeks, major cloud providers' earnings have been released one after another, and market concerns about the overall health and stability of the new generation AI cloud industry have continued to heat up. Rising interest rates have increased companies' debt financing costs, putting enormous pressure on this group of emerging cloud companies supporting global AI construction. Although tech giants have financial buffers that the new generation cloud providers and other peers do not have, investors ultimately hope that unprecedented high spending will eventually translate into massive new revenue sources.
This week's market sentiment has already been reflected in share prices: Alphabet posted its largest single-day drop ever on Thursday; Amazon.com's shares also fell after hours following its earnings release. Amazon.com's retail and advertising businesses both slowed. Online sales rose only 2% year over year, far below last year's 10% growth rate and missing analyst expectations. The midpoint of the company's revenue guidance was below analysts' expectation of $244.5 billion; and because this quarter includes the holiday shopping season, the result is especially disappointing. According to FactSet data, Amazon.com is expected to spend $220 billion in capital expenditure this year; analysts predict that next year the figure will exceed $280 billion, while the company will continue to maintain negative free cash flow.
Meta Platforms, Inc.'s AI agents and related AI models have drawn investor attention for opening potential new revenue directions beyond advertising. But against the backdrop of continued investment in data centers and computing hardware, these new businesses still need time before they can truly significantly drive overall performance. Meta Platforms, Inc. said capital expenditure this year could reach as much as $145 billion; analysts expect spending to exceed $210 billion in 2027, and the cash flow gap will widen further. Even though Meta Platforms, Inc.'s revenue beat expectations, its shares still fell 7% after last week's earnings release. On Monday after the earnings release, Meta Platforms, Inc. announced plans to issue an additional $95 billion worth of stock to raise funds for AI investment.
"Borrowing from the present to invest in the future"
Alphabet's earnings worried investors the most. Growth in its core search business slowed for a third consecutive quarter, missing market expectations. This highlights the severe challenge Google faces as AI chat products such as ChatGPT and Claude rise. YouTube advertising revenue also missed expectations. Evercore analyst Mark Mahaney said Wednesday on a program that Google's AI upgrade of its search business may be "good news," but the slowdown in digital advertising growth is an "overwhelming negative." Forrester analyst Tracy Woo wrote in an email comment: "The market can currently tolerate Alphabet's huge capital expenditure on infrastructure. But online advertising revenue missing expectations puts the company on a tightrope."
"Search and YouTube revenue missing expectations is increasing market fears that AI will erode the company's two major core revenue sources. The problem is not that current earnings missed expectations, but that future AI investment growth may outpace the cash these traditional businesses can generate."
But not everyone is pessimistic. Bullish investors believe tech giants have deep operating foundations and strong traditional main businesses, enough to support their development for the foreseeable future. Check Capital managing director Christopher Ballard said Alphabet's negative free cash flow of $9 billion is not high relative to the overall business scale; quarterly revenue alone exceeds $40 billion. He pointed out that compared with AI model companies such as OpenAI and Anthropic, which are still unprofitable and burn billions of dollars a quarter on infrastructure, Alphabet's balance sheet remains very solid.
"They are borrowing from the present to invest in the future. I think this model can work, and the company is handling it relatively rationally."
Although major hyperscale cloud providers have not yet announced specific capital expenditure targets for next year, all have signaled that even if earnings metrics look ugly, the wave of data center spending will continue to expand. Amazon.com CEO Andy Jassy said on Thursday's earnings call: "If this round of opportunity could be digested slowly over 25 years, and capital expenditure spread over 25 years, then of course it would be much more comfortable. But the real world is not like that, and the window of opportunity will not wait for anyone."
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