Big Tech's AI bill comes due: Alphabet slumps while Microsoft is rewarded

For two years, the biggest technology companies have been rewarded for spending almost anything to win in artificial intelligence. This week, investors started asking harder questions about when that spending pays off, and the answers moved markets sharply.

Alphabet: growth, but a cash crunch

Google's parent company reported third-quarter revenue of $127.58bn on October 28, up 25 percent from a year earlier. Google Cloud revenue more than doubled, growing 103 percent to $30.71bn. "We had a strong quarter and are now on a half-trillion dollar revenue run rate," said chief executive Sundar Pichai.

But earnings per share of $2.12 fell well short of forecasts, ending a long streak of beats. Most of the miss came from an $8.7bn loss on Alphabet's investment portfolio, which includes a large stake in SpaceX, along with higher AI costs.

The bigger worry was cash. Capital spending, mostly on data centres and chips, rose to $51.3bn in the quarter, and free cash flow, the money left after those investments, was negative $9.1bn, the second negative quarter in a row. Alphabet covered the gap by issuing $28.7bn in debt and selling $12.4bn of shares. Its stock fell about 11 percent the next morning.

Microsoft: spending, with visible returns

Microsoft reported the same evening and got the opposite reaction. Revenue rose 19 percent to $92.3bn, and its Azure cloud business grew 48 percent, beating forecasts. It spent $45.2bn on capital projects in the quarter, but still generated $18.6bn in free cash flow.

Chief financial officer Amy Hood argued that "each dollar of CapEx has the potential to support more revenue and higher returns over time." Its shares rose about 2 percent.

Amazon and Meta

Meta, which reported a week earlier, also posted negative free cash flow and expects $135bn to $145bn in capital spending this year. Amazon's results on October 29 disappointed investors, with heavy AI spending pushing its free cash flow negative for a second straight quarter, according to reports.

What the market is saying

Taken together, Amazon, Alphabet, Microsoft and Meta spent about $200bn on property and equipment in the third quarter alone, according to coverage of the results. The reaction suggests investors are no longer treating that spending as automatically good news. They are distinguishing between companies whose AI investment is already producing strong revenue and cash, and those borrowing or diluting shareholders to keep up.

That shift matters well beyond these companies. AI infrastructure spending has been a major driver of US economic growth and stock market gains. If investors keep demanding faster returns, the pace of data centre building, and the chipmakers and power companies that depend on it, could come under pressure.