AI investment boom puts Big Tech's free cash flow under pressure

When those companies report earnings, beginning with Alphabet on Wednesday, investors will be looking for signs that the rapid growth in cloud and AI revenue can keep pace with the expected spending surge. The recent performance in the shares suggests concerns. Hyperscalers led the market rally since the AI buildout began, surging on the promise of future growth. Over the last year, all but one -- Alphabet -- have trailed the S&P 500. "Investors are underestimating how fundamentally AI is changing the Big Tech business model," said Shay Boloor, chief market strategist at Futurum Equities. "These companies were historically valued as asset-light platforms because revenue could scale much faster than capital requirements, but AI is pushing them toward a hybrid model where software, advertising and cloud economics increasingly depend on enormous physical infrastructure spending." The capex estimates cover all spending, not just AI-related expenditures, because companies do not consistently disclose AI-specific investment. Spending on data centers, servers, networking equipment and other cloud infrastructure is largely driven by AI demand, executives have said. The spending outlook is also subject to change. Current-year consensus estimates for the five companies' capex have risen from about $485 billion in January to around $730 billion in July, according to LSEG. There are some signs that AI spending is paying off. Microsoft has said its AI business has surpassed a $37 billion annual revenue run rate, while Amazon reported 28% growth at its AWS unit in its first quarter. Still, for investors, the worry is whether the AI-related cash generation falters while spending persists. Microsoft reported $35.8 billion in operating cash flow in its fiscal second quarter while recording $37.5 billion of capital expenditures, including finance leases. "Earnings growth may not be enough to justify investment if capex is depleting cash. Companies exist to make money, not spend money," said David Russell, global head of market strategy at TradeStation. Amazon said trailing 12-month operating cash flow rose 30% to $148.5 billion in the first quarter, but free cash flow fell to $1.2 billion. Investors seem most alarmed about Oracle, whose shares have lost 36% so far this year as its free cash flow has turned negative. Its capex as a percentage of operating cash flow has steadily increased, and it plans to raise $45 billion to $50 billion through debt and equity to fund cloud infrastructure expansion. Oracle's capex as a percentage of operating cash flow rose from 47% in fiscal 2022 to 174% for fiscal 2026, which ended in May, according to LSEG data. Capex came to $55.7 billion in its most recent fiscal year, compared with operating cash flow of $32 billion. U.S. hyperscalers are starting to show returns on their artificial intelligence investments, but the rising cost of the buildout is taking a bite out of their free cash flow, and investors are noticing. At their current trajectory, the so-called "hyperscalers" -- Microsoft MSFT.O, Alphabet GOOGL.O, Amazon AMZN.O, Meta Platforms META.O and Oracle ORCL.N -- are expected to spend more combined on capital expenditures than they generate in free cash flow by 2027, according to a Reuters analysis of LSEG consensus estimates. The data shows the companies will generate about $340 billion more in annual operating cash flow in 2027 than in 2025, but capex is expected to rise by roughly $534 billion, equivalent to about $1.57 of additional investment for every $1 of additional cash flow. The other companies so far have been able to return cash to shareholders. Microsoft, Alphabet and Meta still generated enough free cash flow to cover dividends and buybacks in their latest fiscal years, according to SEC filings. Buybacks could be at risk if spending remains elevated and AI monetisation takes longer than expected. "Over the next two to three years, companies need to show that AI is driving incremental revenue, expanding margins and improving cash flow," said Freddy Lavric, senior trader at Winthrop Capital Management. "If those financial benefits aren't becoming evident by then, the market will start questioning whether the investment cycle has gone too far."

AI investment boom puts Big Tech's free cash flow under pressure

Investors weigh AI revenue against spending

Cash flow pressure is most visible at Oracle

Hyperscalers face rising capex against cash flow

Buybacks could be pressured if spending stays elevated

Related News

Utz Brands Inc: Stephens cuts to Equal Weight from Overweight; raises target price to $14.25 from $14

Equinor Q2 FY26 net income rises to USD 4.84 billion; operating income climbs to USD 12.99 billion

Marsh & McLennan Companies Inc <MRSH.N>: Piper Sandler Raises Target Price to $188 From $182

ADTRAN Q2 FY26 non-GAAP EPS drops to $0.03-$0.05; revenue falls to $280-$282 million

Rubio says US still willing to negotiate over Iran crisis