Google reports first negative free cash flow ever as AI spending reaches $205 billion in 2026

Google just had its first negative cash flow quarter ever due to massive AI spending

Google has reported its financial results for the second quarter of 2026 (PDF), and as usual, the search giant raked in an unfathomable amount of money. Google saw total revenue of $119.8 billion, beating analyst expectations by a comfortable margin. Despite that, the company's stock has taken a hit. Along with all that revenue, Google has announced a further increase in its AI-fueled capital expenditures (or capex). The company is actually spending so much on AI infrastructure that it has negative cash flow for the first time ever. Search was the largest chunk of Google's income, accounting for $63.3 billion. Google Cloud pulled in $24.8 billion, a significant 23.8 percent increase from the first quarter. This shows there is massive demand for Google's AI services. Google also earned $12.9 billion from its subscriptions, platforms, and devices portfolio, as well as $11.1 billion from YouTube ads. The company managed to goose that last one by more than 12 percent since last quarter as it made YouTube ads even longer. A significant chunk of Google's revenue comes from investments. When you subtract those non-cash earnings, Google's operating cash flow for Q2 2026 was about $39.1 billion. That's not the most the company has ever seen, but it's a healthy 40 percent increase from Q2 2025. The problem is that Google's spending has also gone up -- a lot. Before this latest round of financial updates, Google told investors it was expecting $180-190 billion in capital expenditures for 2026. Like other AI-obsessed tech behemoths, Google is burning cash on building and running the data centers powering its AI models. These numbers were already well above the $91 billion Google spent in 2025. The company now says it's planning to spend as much as $205 billion on infrastructure in 2026. As a result of its increasing AI demands, Google reports it spent $44.9 billion expanding its AI footprint in the second quarter, and you don't need an accounting degree to know which number is larger. With $39.1 billion in cash income, this spending left Google with -$5.8 billion free cash flow. To be clear, Google is still profitable -- wildly so. It's also sitting on a war chest of more than $100 billion. But free cash flow is an important metric that goes to the overall health of a business. This is the actual money a company takes in to fund its operations without selling investments or taking out new loans. So it's notable that Google's free cash flow has dipped into negative territory for the first time since going public. Google's stock price took a hit overnight on the news, dropping about 4.5 percent. It has continued to trend downward today. Onward and upward Google's leadership is signaling to investors that this state of affairs is the new normal. The company points out with much fanfare that its capex spending this year will be about six times higher than the $22 billion it spent in 2022 before the AI boom. Google expects spending to be even higher next year, too. Investors have started to question the scale of AI spending, which is expected to top $700 billion industry-wide this year. Tech firms used to be reliable stocks, reporting high profits and juicy margins, but the race to build AI data centers and train new models has changed the landscape. Google is in a better position than most, with a robust ad business and cloud services that pull in plenty of cash. It just wasn't quite enough cash to offset its spending this time. It also designs its own AI chips, and the latest Tensor 8i and 8t are supposed to be more efficient for AI data centers. Where things go from here is uncertain. People are clearly more sensitive to the high cost and lack of profit in AI, so Google's stock price may be in for a minor correction. Things will probably even out for the company if it can continue to compete with other major AI players. Google recently delayed the release of its flagship Gemini 3.5 Pro model, which it says is still in testing with a small number of partners. Reports have suggested that Google is not seeing the kind of gains it needs to remain competitive with the likes of GPT 5.6 and Claude Mythos. Google has also been hit with a wave of resignations among its top AI researchers. The next few months may be pivotal for Google's AI efforts.

AI's finally expensive enough to make Wall Street nervous

It's earnings season, and investors got an unpleasant surprise from Google: an increase on its spending estimate, to as much as $205 billion -- from the last quarter's projection of up to $190 billion. Even the lower end of Google's new projected range -- $195 billion -- is much more than the company had previously forecast as its top end spending. Now, look, I recognize that there's an impulse to say things like "What's $15 billion between friends?" but from an investor's perspective, Google has essentially said that it can't accurately forecast its costs, which is a scary thing. Plus, Google is spending more money than it's making. And Google is also facing competitive pressures from Chinese AI tools, as well as pricing pressure to keep the cost of its models low. You don't have to be a finance genius to figure out that spending more than you make isn't an ideal business practice. What's more, increased spending in an environment where you have to either keep your prices static or drop them doesn't bode well. You're spending more and getting the same amount back, or -- worse -- spending more for less revenue. These pressures aren't just on Google. They're on the entire AI ecosystem. Meta, Amazon, and Microsoft will all report their earnings this week, and there are plenty of people who think they will also announce they are spending more than expected on the data center buildout. There are a few other things happening at the same time that suggest investors are getting nervous. First of all, people seem to have finally noticed that SpaceX sucks; as of this writing, its shares are worth almost half as much as they were during its peak. Second, investors are nervous about Oracle's datacenter buildout debt, and it's worth keeping in mind that Oracle is the public market's stand-in for OpenAI. Third, Nvidia has been engaging in rounds of deal talks worth a combined three-quarters of a trillion dollars. Nvidia -- even more so than OpenAI -- is at the center of the circular financing in the AI ecosystem. If it is pumping more money into supporting the AI buildout, that may be an indication that the actual demand is weaker than expected. Specifically, Nvidia guaranteeing OpenAI's debt, a deal worth $250 billion, is "as much a reminder of funding strain in the AI build-out as it is a demand signal," Billy Leung, Global X Management's tech sector investment strategist, told Bloomberg. On top of all that, a Chinese start-up released a new model, and people get nervous every time that happens. One reason for that nervousness is that China's biggest constraint is that they -- at least theoretically -- don't have the same kind of access to GPUs as US companies, and yet their AI systems are still competitive. If that is indeed what is happening, there's an end in sight to Nvidia (and other chipmakers') cash bonanza. What's more, it may mean that companies are building too many data centers. I've spoken to a lot of smart people who are more optimistic than I am about the AI boom. (I have been asking how AI companies plan to actually make money for three years now, and I still have not received a satisfactory answer.) All of them think we will likely overbuild data centers during this period of exuberance. They also think that a lot of AI companies will die off when the inevitable correction comes. They are invested in the space anyway because they think the companies that survive will make them more money than they will lose on the ones that die off. So the AI boosters are watching for the market top just like everyone else; they know it's inevitable. It's hard to figure out what the market top is in advance, of course. But some investors are clearly starting to get cold feet about the whole AI thing, and they're moving their money elsewhere. We may very well get earnings from the other big tech companies that reassure investors, and this period of AI anxiety will pass. On the other hand, if you're looking for top signals, Elon Musk is a pretty good one, and SpaceX did just go public. Best of luck to all of us, I guess!

Alphabet's cash burn raises alarm for Big Tech as AI spending climbs

July 23 (Reuters) - Alphabet's (GOOGL.O), opens new tab first cash burn on record has jolted investors awaiting more Big Tech results next week as soaring AI spending strains one of the world's most profitable companies, and the pain is only expected to increase. The Google parent burned $5.9 billion in the second quarter, even as the cloud unit that rents out AI computing power notched a record 82% growth. With Alphabet now expected to spend $15 billion more in 2026 and predicting another increase next year, the outlays behind the cash burn will only rise. The cash hit is one of the clearest signs of how AI is reshaping Big Tech. Once prized for fat margins and cash gushers that could easily fund new bets, the group is now leaning on debt and share sales to bankroll spending, which is set to top $700 billion this year as their cash flows fall short. That will sharpen scrutiny when Microsoft (MSFT.O), opens new tab, Meta Platforms (META.O), opens new tab and Amazon (AMZN.O), opens new tab report results next week. Shares of all ⁠three companies were down between 2% and 4% before the bell on Thursday as Alphabet led the slide at 5%. The drop reflects investor concerns that the other tech giants will likely follow Alphabet by raising spending forecasts despite payoffs lagging the pace of outlays. "The risk is tilted towards further increases, particularly while Microsoft and others remain capacity-constrained," Charu Chanana, chief investment strategist at Saxo Markets, said. "But investors will increasingly focus on how much of that cash must be reinvested simply to remain competitive -- and whether AI revenue can grow faster than capital expenditure, depreciation and operating costs." Analysts expect Alphabet and Amazon to burn cash in 2026, while Meta's cash flow is likely to shrink 95.7% to just $1.85 billion. Microsoft, whose current fiscal year will end next June, is expected to garner $25.39 billion in cash, less than half of the estimated $58.74 billion in the previous financial year. Their capex-to-revenue ratio, a gauge of how much of every sales dollar is being plowed back into spending, is set to nearly double this fiscal year. Meta is expected to hit 54.9% from 35.9%, Alphabet 41% from 23%, Microsoft 45% ⁠from 31% and Amazon 25% from 18%. GOOGLE CLOUD GROWTH TO PRESSURE RIVALS Adding pressure to Amazon and Microsoft is also the strong performance of Google Cloud, which has been growing much faster than its bigger rivals in recent quarters in a sign that it could be taking market share. Demand has been so strong that Alphabet executives said they plan to rent out more data-center capacity from other companies to serve their clients, even though it will hurt margins. At least 20 brokerages raised their price targets on Alphabet after Wednesday's results, lifting the median to $430, nearly 26% above the last close. ⁠Citizens was the most bullish at $515, while TD Cowen was the most bearish at $240. "Google Cloud was an absolute blow out," said Richard Clode, Portfolio Manager of Janus Henderson Investors' Global Technology Leaders. "Alphabet has competitive advantage running all the way through the stack from their own custom AI chips through to distribution to billions of users." Growth at Amazon Web Services - the largest cloud provider in the ⁠U.S. - is expected to hit 31.04% in the quarter, faster than the 28.4% increase seen in the previous three months. Microsoft, meanwhile, is expected to post growth of 39.98%, on par with the 40% increase seen in January-March quarter. That could weigh on the Windows maker's shares, which have declined by nearly a fifth this year and are the worst ⁠performers in the "Magnificent Seven" group of stocks. Competition is also set to deepen as Meta engages in talks to rent out computing power to Anthropic, adding to an industry that already includes AI cloud firms like CoreWeave (CRWV.O), opens new tab. "As compute becomes more available and models become cheaper, cloud capacity may look increasingly interchangeable. That could force providers to spend more while accepting lower returns," said Lale Akoner, global market strategist at eToro. Reporting by Aditya Soni and Deborah Sophia in Bengaluru; Editing by Arun Koyyur Our Standards: The Thomson Reuters Trust Principles., opens new tab

Hyperscalers' aggressive AI spending is rattling their stocks. But the bull market is hinging on it

Google parent company Alphabet boosted its forecast for capital spending for both 2026 and 2027 last week, citing supply constraints amid surging demand for more computing power. Shares tumbled Thursday following the announcement that the company's 2026 capex would increase its potential maximum to $205 billion from $190 billion . GOOGL 5D mountain Class A shares of Alphabet in the past five trading days While allocations for more investment mean larger debt service costs and potentially less money to return to shareholders in the short term, the alternative could be far worse. A substantial capex cut from any of the big cloud computing companies would tank the market, investors said. "The market would go straight down," Steve Eisman, an investor famous for shorting the 2008 housing bubble, told CNBC Monday. "If the hyperscalers cut ... the market would go straight down on that news." JPMorgan traders issued a similar warning on Friday. "If we see a capex cut, or to a lesser degree buyback reduction, that will roil the markets pushing us toward a bearish view," they wrote in a note to clients. The JPMorgan traders described themselves as "tactically bullish" but see diminished hyperscaler capex as a "datapoint that could flip us to a more bearish stance." A spending pullback would be worse than a reduction in short-term returns because it could indicate that wider demand for computing capacity is leveling off and that predictions may have overshot their marks. "I worry about the indication that if their capex slows, then that's a sign that demand is waning a bit," Paul Meeks, head of technology research at Freedom Capital Markets, told CNBC. Wall Street is expecting about $260 billion in capex from Google in 2027, Meeks said. "I think people would be satisfied [with that]," he added. "The thing I worry about is if you have a drop in spending: All of a sudden it's $205 billion for Google this year, and next year it's, say, $100 billion - it collapses." The ratchet up in the spending forecast from Google follows an $80 billion equity raise from the company in June that took many investors by surprise. That move amounted to a "very modest" 2% stock dilution , according to an analysis from Wells Fargo, and it forced Wall Street to revise its math on expected returns from both Google and the cloud computing sector as a whole. "The event likely compels investors to re-underwrite the capacity ROI thesis at Google and perhaps more broadly across the hyperscalers," Ken Gawrelski at Wells Fargo wrote last month. An alternative, positive scenario for stocks could come to pass if companies taper their capex over the next year in line with expectations, as opposed to giving it a drastic defensive cut. Since bears are already likely pricing in that drastic reduction, its failure to materialize would represent a major vote of confidence. "If that happens, I think that would be a positive sign and maybe stocks would go up," Meeks said.

Google records its first negative free cash flow since going public as its AI spending explodes

Serving tech enthusiasts for over 25 years. TechSpot means tech analysis and advice you can trust. What just happened? In a perfect illustration of how much money companies are pouring into their AI investments, Google has just recorded its first negative free cash flow since it went public more than two decades ago. It comes as the tech giant said its capital expenditure is expected to reach $205 billion this year, up from previous guidance of $180 billion to $190 billion. Google said its free cash flow - the cash it had remaining after paying for operations and investments - for the three months to the end of June was at negative $5.9 billion. The revelation, combined with the announcement that it would be spending even more money on AI hardware and infrastructure, sent the company's stock down 4% in after-hours trading. It's not just this year that Google is planning on spending billions. Anat Ashkenazi, parent company Alphabet's chief financial officer, said capital expenditures will also increase significantly in 2027. Bloomberg expects the figure to reach $262 billion next year. "We expect that free cash flow will remain under pressure driven by our investments in technical infrastructure, which enable us to capitalize on the AI opportunity and continue to drive attractive returns," Ashkenazi said. Courtesy of App Economy Insights Ashkenazi added that the company spent $45 billion in the second quarter, with 60% of the cost going towards servers and 40% being used for data centres. Google isn't the only company facing this position; Tesla has also reported negative cash flow of $1.1 billion. It's the first time this has happened in more than two years as Elon Musk's company continues spending billions on AI. Vaibhav Taneja, Tesla's chief financial officer, said its capital spending could more than double this year to as much as $25 billion. Tesla stock also dropped by 4%. Meta, Microsoft, and Amazon are also expected to see their free cash flow turn negative next year. Although the trillions being spent on AI are making the industry look increasingly like a bubble that's getting ever closer to bursting, Ashkenazi insists that AI demand still outpaces the investments being made. "As long as we see these attractive opportunities to invest, we will continue to invest," she said. Google CEO Sundar Pichai admitted that most users aren't yet experiencing many benefits from the obscene amount of money being spent on AI. "What I see with what you can do with frontier capabilities, there is still a lot of work left to do to translate that into experiences for our users. So that looks like extraordinary opportunities with extraordinary returns." The rising cost of memory, which is ironically being driven by the AI craze, is contributing to these higher capital expenditures. But investors are becoming increasingly worried about all this money being spent for little return. Big names within the industry are trying to calm fears. Nvidia's Jensen Huang believes agentic AI will cause hyperscalers' cash flow to grow, while Adata chairman Chen Li-bai thinks we shouldn't even be discussing the subject of an AI bubble until 2040 or even 2050. It was reported yesterday that Amazon, Meta, Microsoft, and other US tech giants are carrying a collective "hidden" debt of over $1.65 trillion, driven largely by massive spending on AI infrastructure.

Google burning through cash with spiralling AI costs

Google parent Alphabet saw its business continue to grow in recent months, yet growing spending on artificial intelligence (AI) infrastructure put its leftover cash into negative territory. The company's free cash flow, the cash it maintained after paying for operations and investments, came in at negative $5.9bn (£4.3bn) for the first time in at least a decade, according to its past financial records. Alphabet's spending on AI is now expected to hit as much as $205bn this year, an increase from $190bn, as major tech companies race to build around a new wave of the technology. Meanwhile, Alphabet's combined quarterly revenue hit $119.8bn, up 23% compared with the same time last year. But the company's stock fell 4% in after hours trading. Anat Ashkanazi, Google's chief financial officer, noted on a call with financial analysts that the company had shown negative free cash flow due to growing capital expenditures, essentially all of which was related to AI spending. She noted that the company spent $45bn in the second quarter, with 60% of the cost going towards servers and the remaining 40% going towards data centres. Alphabet's capital spending was $36bn in the first quarter of this year. Ashkanazi said on the call that when it comes to AI, "the demand still outpaces that investment". "As long as we see these attractive opportunities to invest, we will continue to invest." Sundar Pichai, Google's chief executive, said that the technological shift to AI tools and capabilities still "feels like early innings in a shift across multiple areas" and that the company's plans around generating financial returns on its spending were "disciplined". "What I see with what you can do with frontier capabilities, there is still a lot of work left to do to translate that into experiences for our users. So that looks like extraordinary opportunities with extraordinary returns."

Google's burning through cash despite record profits, and take a wild guess on what

These increased expenses were reportedly because of new AI infrastructure and increased R&D costs. Artificial Intelligence, now known in every household as AI, has long been positioned as the pioneering technology that frees humans from their mundane obligations and lets them focus on creative pursuits. During its rise since the launch of ChatGPT, however, AI has proven to excel at routine creative tasks like writing and generating images, videos, and even music. And that has been used as a cover to discharge the human workforce for better financial rewards. While the results may be contentious, and unique for companies now shifting workloads to AI, there's a clear money pattern that cannot be ignored, and that has to do with the record money spent on building core AI resources. Google's latest earnings call verifies that notion. Google's parent company, Alphabet, announced its Q2 earnings. It said revenue grew by 24% year-on-year in Q2 2026, with quarterly revenue hovering around $120 billion. This accounts for one of the highest profits Google's parent has made in, like, ever. The biggest contributor to that growth was Google Cloud Platform, which includes enterprise AI solutions, AI infrastructure, and the core cloud services for corporate clients, contributing roughly $25 billion in revenue during the period. Interestingly, part of that comes from Google's resources commissioned by rival Anthropic. Alphabet's other avenues, including Google Ads, YouTube Ads, and other subscription-led services, also recorded higher YoY revenue. However, one key area where Google lost a major chunk this quarter is its liquid cash. According to the latest balance sheet, Alphabet posted a free cash flow of negative $5.855 billion. According to the BBC, this is the first time in 10 years that Google has posted negative cash flow. This is driven by increased capital expenditure of $44.9 billion, almost twice the capex of $22.4 billion last year. Most of these expenses were notably incurred due to increasing AI-related expenses, which include building new infrastructure (data centers, servers, and TPUs), along with increased AI R&D expenses. According to rough estimates by analysts, Google's AI-related spending may scale to roughly $205 billion in this financial year. It's worth pointing out that instead of dipping into its cash reserves, Alphabet raised new capital to the tune of $85 billion, including a $10 billion investment from Berkshire Hathaway. That's why Alphabet's total reserve of cash equivalents and securities rose from $127 billion at the end of Q1 to nearly double, at $242.5 billion, at the end of Q2. Alphabet isn't the only one excessively spending on AI infrastructure. According to OpenAI's recently leaked financials, the company's losses widened in 2025 as its spending increased to $34 billion, more than quadrupling its losses compared to 2024. Exuberant spending is not just the case with companies like Google and OpenAI, but also smaller companies relying on AI. In recent months, we've seen a shift from tokenmaxxing to reduced spending and a return to reliance on the human workforce due to unprecedented AI operational costs. Whether that's the beginning of the pricking of the AI bubble is something difficult to say, but Alphabet's overall ballooning profits suggest it's not preparing for a slowdown anytime soon.

Google Free Cash Flow Turns Negative Due to Massive AI Spend

Google's free cash flow for the second quarter of 2026 turned negative for the first time in the tech giant's history as a publicly traded company, driven by record spending on artificial intelligence. Google ended the quarter with a negative free cash flow of $5.9 billion, company executives shared in the earnings call, and updated expectations to spend up to $205 billion in 2026, up from previous guidance of $180 billion to $190 billion. The capital expenditures will also "increase significantly in 2027," parent company Alphabet's chief financial officer Anat Ashkenazi said on the call. Analysts expect that number to at least hit $262 billion, according to Bloomberg. The reason? Usual suspect: the AI investment boom. "We expect that free cash flow will remain under pressure driven by our investments in technical infrastructure, which enable us to capitalize on the AI opportunity and continue to drive attractive returns," Ashkenazi said. The tech industry is pouring trillions of dollars into building out supply for what they claim is unprecedented AI demand. But some experts fear the investment is simply too big and unwarranted, raising fears of a potential AI bubble. The free cash flow of the four AI hyperscalers -Google, Meta, Microsoft and Amazon- was expected to go negative by 2027 after the eye-watering capex commitments announced in the last round of earnings. Some investors are worried that Silicon Valley might be recklessly burning through cash in its AI buildout goal with limited returns. If the returns on that investment don't pan out as expected, it's bound to hit Nvidia's financials as well, considering that the chipmaker counts all four hyperscalers as major customers. That's why Nvidia CEO Jensen Huang has spent the last couple of months trying to ease Wall Street worries over this scenario, going on to say in the company's earnings call in March that he is "confident" that the hyperscalers' cash flow will grow, because "we have now seen the inflection of agentic AI and the usefulness of agents across the world in enterprises everywhere." That fear is also one of the likely reasons why Apple, which has largely steered clear from the AI spending gold rush at the expense of lagging peers, has outperformed its hyperscaler peers in the stock market and even briefly dethroned Nvidia as the most valuable company last week. To quell worries at least a bit for Google fanatics, the company did provide numbers showing a pretty robust cloud business. Cloud sales hit $24.77 billion for the quarter, up a whopping 82% from last year. "We are seeing very strong demand both from external cloud customers as well as across the business, and our goal is to invest as long as we see an attractive return on that investment," Ashkenazi said. Despite the success on the cloud side and the 24% overall revenue growth, sales came in below investor expectations for the company's bread and butter, Search. That's even though Google CEO Pichai said Search usage hit an all-time high this summer thanks to the World Cup. Also putting pressure on Google is its performance in the AI products scene. Google burst onto the frontier AI models scene with Gemini 3 and its image generator Nano Banana Pro last year, causing much of the internet to question whether OpenAI's leading position in the industry was officially under threat from the tech giant. But since the stellar debuts in November 2025, the company has been rather silent as competitors like Anthropic boast flashy debuts one after another. Google did, however, unveil Gemini 3.6 Flash earlier this week, but the model appears to lag behind the latest releases from OpenAI and Anthropic in most major benchmarks, and even behind Musk's Grok 4.5 on some tests. Meanwhile, the promised Gemini 3.5 Pro, its most powerful flagship model, is reportedly months behind schedule. On Wednesday's earnings call, Pichai said the Gemini 3.5 Pro model was currently in testing, and also teased Gemini 4, promising an ambitious new model. "We are now training Gemini 4, and we're being very ambitious with it," Pichai said. "We wanted to compete at the frontier level of where the frontier will be when Gemini 4 comes out, and so we are applying a lot of our compute and effort in that direction," Pichai said. "But with that, we are creating a baseline on top of which you will see us rapidly iterate with subsequent model releases, and so picking up pace and releasing models almost at a monthly cadence is part of our roadmap as we are building Gemini 4."

Big Tech's AI spending is catching up with its cash flow

Combined capital spending at the largest cloud operators is on track to overtake the cash their core businesses generate, and free cash flow is where the strain shows first. The four largest US technology companies are on course to spend close to $700bn on artificial intelligence infrastructure this year, and the cost is starting to show up in the one figure that is hard to dress up: free cash flow. An analysis by Reuters, found that combined capital spending across the major cloud operators is set to overtake the cash their core businesses generate. Wall Street's consensus for this year's AI capex has climbed from roughly $485bn in January to about $730bn by July, on the figures Reuters compiled. The sharpest early warning came from Amazon, whose free cash flow fell to $1.2bn on a trailing 12-month basis in the first quarter, down from about $26bn a year earlier, even as operating cash flow rose 30% to $148.5bn. The mechanics are straightforward. Capital spending is growing far faster than the money coming in. Epoch AI estimates that hyperscaler capex is expanding at roughly 70% a year while operating cash flow grows about 23%, which puts aggregate spending on track to overtake operating cash flow around the third quarter of 2026. Reuters put the gap in blunt terms. Between 2025 and 2027, capital expenditure across Microsoft, Alphabet, Amazon, Meta, and Oracle is expected to rise by about $534bn, against a roughly $340bn increase in operating cash flow. That works out at $1.57 of capex for every additional dollar of cash the businesses generate. Not every company is under the same strain. Microsoft reported $37.5bn of capital spending, including finance leases, in its fiscal second quarter, against $35.8bn of operating cash flow, and has guided towards roughly $190bn for the year. Alphabet and Meta are still producing enough cash to cover dividends and buybacks, at least for now. The guidance keeps climbing regardless. Meta has said it will spend up to $145bn this year, and Alphabet has reset its own bar higher for a second consecutive quarter. Asked about the return on all that outlay, Meta chief executive Mark Zuckerberg told analysts in April that it was "a very technical question," which is roughly the answer the market has been given across the sector. Oracle is furthest down the road. Its capex reached 174% of operating cash flow in fiscal 2026, up from 47% four years earlier, and its free cash flow has turned negative. The company's credit rating sits one notch above junk, and it has signalled plans to raise between $45bn and $50bn to keep building. That points to the wider shift. Most of the hyperscalers have already turned to external financing, whether cash reserves, bond issuance, or equity, to fund the build-out rather than pay for it out of operations. Amazon, Alphabet, and Meta have all tapped the bond markets in recent months, at a scale that has begun to reshape corporate debt issuance on both sides of the Atlantic. The question investors keep returning to is whether the spending pays off. "AI is pushing them toward a hybrid model where software, advertising and cloud economics increasingly depend on enormous physical infrastructure spending," Shay Boloor of Futurum Equities told Reuters. Others are more cautious about the timeline. David Russell of TradeStation warned that "earnings growth may not be enough to justify investment if capex is depleting cash," while Freddy Lavric of Winthrop Capital said companies would need two to three years to show the spending translates into incremental revenue and improving margins. For now, the accounting cushions the blow. Because capital spending is depreciated over years rather than booked upfront, all of the big spenders remain profitable, and increasingly so. Free cash flow is simply where the pressure lands first. The next test comes with the quarterly earnings due in the coming weeks. Investors will be watching capex guidance at least as closely as revenue, and for once the two numbers may well pull in opposite directions.

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

July 22 (Reuters) - 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), opens new tab, Alphabet (GOOGL.O), opens new tab, Amazon (AMZN.O), opens new tab, Meta Platforms (META.O), opens new tab and Oracle (ORCL.N), opens new tab -- 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. 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. WORRIES ABOUT CASH FLOW 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. 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." Reporting By Patturaja Murugaboopathy in Bengaluru Editing by Vidya Ranganathan and David Gaffen Our Standards: The Thomson Reuters Trust Principles., opens new tab

Tesla and Alphabet shares slump in premarket trading as AI spending concerns spook investors

Both companies reported negative free cash flow for the second quarter on Wednesday. Alphabet raised its capital expenditure forecast for this year to $195 billion to $205 billion and warned of higher figures in 2027. The Google parent company's previous projection was for capex between $180 billion and $190 billion. Tesla, meanwhile said capex surged 142% year-on-year in the second quarter to $5.79 billion. The company said it expects more than $25 billion in capex this year. Management at both companies looked to calm investor fears over spending. "This is a massive capex year. I'm confident that all the things that we're investing in will yield incredible returns. Really, maybe the best capex returns that we've ever seen," Tesla CEO Elon Musk said on the earnings call on Wednesday. Musk talked up the company's future initiatives around semiconductor production and Optimus, Tesla's humanoid robot, as it highlighted where the spending was going. Tesla is "installing the first-generation lines for Optimus," and will "start production soon," the company said in its earnings presentation. Alphabet's CEO said the spending increase "is primarily due to an acceleration in the delivery of capacity to meet growing demand." The tech giant has maintained that it does not have enough computing capacity to meet the AI demand that it is seeing. Spending figures at both companies offset some bright spots. There were signs that some of Google's investments were beginning to pay off. Google's cloud revenue jumped 82% to $24.8 billion, beating forecasts. At Tesla, the company's core automotive business brought in $20.52 billion in revenue, up 23% year-on-year. -- CNBC's Lora Kolodny and MacKenzie Sigalos contributed to this report.

Google reports negative free cash flow amid AI spending spree

Google made nearly $120 billion in earnings last quarter. Somehow, that still was not enough to cover what the company is pouring into AI. Alphabet, Google's parent company, announced Wednesday, July 22, that it recorded negative free cash flow of $5.9 billion for the second quarter of 2026, marking the first time that figure has fallen below zero since the company went public. Google generated $39.1 billion in operating cash flow, but spent $44.9 billion on capital projects, with most of the money going toward the servers, data centers, and networking equipment needed to support its AI products. To be clear, Google is still making plenty of money. In the Q2 2026 earnings report, the company disclosed $119.8 billion in quarterly revenue, a 24 percent increase from the same period last year. Its operating income reached $40.8 billion, while its net income climbed to a record $112.1 billion. There is an important catch to that record profit, however. Much of it came from Alphabet's investments rather than its main businesses. The company reported approximately $98 billion in other, primarily from unrealized gains in its portfolio of equity investments. Those gains reflect assets that increased in value but were not necessarily sold for cash. Free cash flow offers a look at the money Google actually had left after covering its operating expenses and investments in assets such as equipment and facilities. The company typically produces billions of dollars in free cash flow each quarter. This time, though, its rapidly growing infrastructure costs consumed more cash than its businesses generated. And Google does not plan to slow down. Also on July 22, the company raised its expected capital spending for 2026 to between $195 billion and $205 billion. Google had previously told investors during its first-quarter earnings report on April 29 that it expected to spend between $180 billion and $190 billion this year. The updated forecast would be more than twice the approximately $91 billion it spent in 2025. The bill is expected to keep growing next year. During Alphabet's call on Wednesday, Chief Financial Officer Anat Ashkenazi told investors that capital expenditures would increase "significantly" again in 2027. "We expect that free cash flow will remain under pressure driven by our investments in technical infrastructure, which enable us to capitalize on the AI opportunity and continue to drive attractive returns," Ashkenazi said. So, where is all that money going? According to Ashkenazi, approximately 60 percent of Google's technical infrastructure spending during the quarter went toward servers. The remaining 40 percent went toward data centers and networking equipment. Google also said it needs that additional capacity to meet demand from outside cloud customers and support its own products, including Search, Gemini, and Google Workspace. There are already signs that some of the spending is paying off: Google reported that Cloud revenue reached $24.8 billion during the quarter, an 82 percent increase from the previous year, while its operating income more than tripled to $8.8 billion. Google's other major businesses continued to grow, too. The company also reported that Search advertising generated $63.3 billion, YouTube advertising brought in $11.1 billion, and revenue from subscriptions, platforms, and devices reached $12.9 billion. Google said demand for AI subscriptions helped boost its Google One business. They are hardly the only company writing enormous checks for AI. Google, Amazon, Microsoft, and Meta are collectively expected to invest more than $700 billion this year, largely in data centers, chips, and electricity required to build and run their AI systems. Investors, however, did not appear reassured by Google's growth. Alphabet shares fell nearly 7 percent on Thursday, July 23, the day after the company raised its spending forecast and warned that free cash flow would remain under pressure. Google still has a substantial financial cushion, but with the company already warning that infrastructure spending will climb significantly again in 2027, this may not be the last quarter in which Google's enormous AI bill outpaces the cash coming in.

AI is forcing Big Tech to do something it's never done: Spend more than it earns, and Wall Street hates it | Fortune

First, it had its most-profitable quarter in corporate history. Reporting $112 billion in profit, that's its first 12-figured quarterly profit in history. But 69% of that came from unrealized paper gains on its stakes in SpaceX and Anthropic, not the core business, and Wall Street looked straight through it. Stripping that out, however, Google still ostensibly had an excellent quarter; its cloud computing business, now the core of the company, soared 82%. So why did investors punish Alphabet today, sending their shares down nearly 7%, the worst day since tariffs? Because of the other record it set: for the first time in the company's history, it became cash flow negative, meaning less cash entered the company than left it last quarter. Management also warned that 2027 capital expenditures would be "significantly" higher, further deepening anxiety on the Street. The company's latest filing Thursday shows more than $800 billion in purchase commitments and other obligations, an eye-popping number that reveals some sneakier expenses like some $51 billion spent backstopping other companies' data centers. At least six firms cut their price targets for Alphabet in response, including Piper Sandler (to $395), UBS (to $379) and D.A. Davidson, whose $350 target was one of the most bearish on the Street. Only Barclays raised its target. The damage was contagious, spreading outward to Microsoft, Amazon, Nvidia and the chip complex, and compounded this week by jitters over a new wave of powerful Chinese open-weight models. Tesla also reported a profit margin decline and high capital expenditure, sending its stock down 15%. "The fact that we crossed over to negative cash flow was kind of a negative milestone, and people are reacting to that," Gil Luria, head of technology research at D.A. Davidson, told Fortune. "Maybe there was a sense that we'd never get to that point, and we just did." Yet Luria, despite cutting his target, said the market was overreacting. His concern was never the spending but the valuation; earlier this year, with the stock near $400, "it was being valued as if it was the only winner." At around $320, he said, "Google's valuation is a lot more reasonable -- because it's the valuation of a company that's a winner, as opposed to the winner." He expects Microsoft, Amazon and Alphabet all to profit from supplying AI compute for years. The bullish case, he said, is hiding in plain sight: Google Cloud's "out of this world" growth. He estimated Alphabet will earn $15 billion to $20 billion this year directly from its compute buildout. "Nobody wants to hear that on a negative-milestone day where the CFO just told us it's going to get worse before it gets better." Luria, however, worried about that tangle of investments which bind the AI giants to their own customers; the love triangle of Google, Amazon and Anthropic; Microsoft and OpenAI, Nvidia and CoreWeave. "This ecosystem is propping itself up," he said, and the off-balance-sheet backstops give him pause: "That term came into parlance around Enron, which is why I never like hearing it." But he drew a line at calling it circular. Consumers and businesses are now spending at a $120 billion annual rate on AI, he noted -- "that number was zero two years ago." "That's real spend. There's nothing circular about that."

Alphabet and Tesla test Wall Street's patience as AI spending overshadows growth

Alphabet and Tesla both reported negative free cash flow in the second quarter. When Alphabet and Tesla kicked off tech earnings season on Wednesday, one theme became immediately clear: AI spending is under a microscope. Both companies reported negative free cash flow for the latest quarter and told investors to prepare for higher capital expenditures. They both also reported better-than-expected revenue, but that wasn't enough to prevent an after-market selloff, with Tesla shares sliding 4% and Alphabet down more than 3%. It's a potentially ominous sign for the tech industry, particularly the other megacaps, which are mostly set to report quarterly results next week. Meta and Microsoft are scheduled to report next Wednesday, followed a day later by Amazon and Apple. Much of the AI boom to date has been fueled by historic levels of infrastructure spending among a small crop of companies, including hefty investments into model developers OpenAI and Anthropic. But the recent emergence of cheaper open-source models, largely out of China, along with signs that corporate America is getting more frugal when it comes to spending on AI services, has raised concerns about the future returns on investment. Heading into Wednesday's reports, Alphabet's stock was already on pace for its third straight monthly decline after surging in April, while Tesla shares were down 11% in July and 17% for the year. The tech-heavy Nasdaq has dropped about 5% since reaching a record in early June. While Alphabet and Tesla are both spending at unprecedented levels, their numbers vary dramatically. Google's parent company forecast capex for this year of $195 billion to $205 billion and warned of higher numbers in 2027. Prior guidance was for spending of $180 billion to $190 billion. At the top end of the new range, Alphabet could be the biggest spender in tech this year, as Amazon's latest guidance was for more than $200 billion, though that number may increase when the company reports results next week. Google and its hyperscaler peers are building out data centers packed with advanced chips so they can provide the computing power necessary to build and run the leading AI models and the services they power. Mizuho analysts wrote in a note that Google's capex increase was "broadly anticipated," and that the overall story is positive, largely due to the surge in cloud revenue, which jumped 82% from a year earlier, blowing past estimates. Cloud margins expanded and usage of Google's Gemini model accelerated. "As such we are surprised the stock is trading off after hours and would expect it to recover in trading tomorrow," wrote the analysts, who recommend buying the stock. Tesla reiterated expectations for more than $25 billion in capex this year, which would represent about 200% year-over-year growth. In the second quarter, capex soared 142% to $5.79 billion. The company boosted spending on self-driving technology, AI and robotics initiatives that CEO Elon Musk has been touting for years. Tesla is now retooling its factories to make the two-seater driverless Cybercab, and to manufacture Optimus humanoid robots, which are still being developed, while also preparing to start construction of a sprawling AI chip-manufacturing plant in Texas. "We should be spending on capex as fast as we can spend, as fast as we can without it being too wasteful," Musk said on the earnings call. He added, "It's ok to be a little less capital efficient if we get things done sooner." For both companies, the aggressive growth plans are resulting in a major hit to their cash holdings. Free cash flow at Tesla turned negative in the quarter, with a deficit of $1.1 billion after the company generated $146 million in free cash flow a year ago and $1.44 billion in the first quarter of 2026. "This is a massive capex year but we are confident that all the things that we are investing in will yield incredible returns," Musk said. He compared Tesla's spending and building in "many different arenas simultaneously," to that of Henry Ford with the Model T. "I think probably this is the fastest industrial scale-up since World War II in America," Musk said. The numbers at Alphabet were even more stark, with free cash flow sinking to negative $5.9 billion after the company, which is lauded for its fat margins from online ads, generated almost $25 billion in free cash flow a year ago. "We expect the free cash flow will remain under pressure, driven by our investments in technical infrastructure, which enables us to capitalize on the AI opportunity and continue to drive attractive returns," CFO Anat Ashkenazi said on the earnings call. Most of the company's $44.9 billion in capex in the second quarter went to infrastructure to support the AI buildout, Ashkenazi said. In addition to building its own data centers, Google executives said they also plan to rely on capacity from third-party cloud providers to meet feverish computing demand, building on a recent compute deal with Musk's SpaceX, which now owns xAI and its Memphis data centers. The results on Wednesday did nothing to squash the enthusiasm of bullish analysts and investors. Keith Fitz-Gerald, principal at investment consulting firm Fitz-Gerald Group, said that at Tesla, "profitability is being sacrificed for infrastructure" just as it was previously at companies including Amazon and Netflix. "I expect it to pay off in spades over the next 12-24, even 36 months," Fitz-Gerald wrote in a note after the report. And Rebecca Wettemann, CEO of tech research firm Valoir, said in an email that Google's core business remains strong and that its AI investments are generating returns. "Google's momentum should calm some market fears about AI overspending," she wrote. "Strong performance across its businesses show search isn't dead, advertising still matters, and cloud investment is still a good bet." Choose CNBC as your preferred source on Google and never miss a moment from the most trusted name in business news.

Big Drop in Alphabet Stock Underscores Investor Unease With AI Spending

Get personalized, AI-powered answers built on 27+ years of trusted expertise. Alphabet's AI spending is translating into growth. Investors still aren't loving the price tag. Shares of Google-parent Alphabet (GOOG)(GOOGL) plunged more than 6% on Thursday as investors bristled at the mounting costs and uncertain benefits of its AI data center buildout, even as its infrastructure spending began to bear fruit. Alphabet on Wednesday raised its full-year capital expenditures guidance range to $195 billion to $205 billion from the $180 billion to $190 billion range it gave just three months ago. CFO Anat Ashkenazi said the increase was "primarily due to an acceleration in the delivery of [cloud computing] capacity to meet growing demand," and predicted capex would continue to "increase significantly" next year. Investors are increasingly worried about the bills being racked up by Alphabet and its hyperscaler peers Microsoft (MSFT), Amazon (AMZN), Meta (META) and Oracle (ORCL) as they rapidly increase their spending on AI infrastructure. The group is expected to spend more than $700 billion on capex this year, with the majority of that spending earmarked for AI enabling infrastructure such as chips, servers and networking equipment. The fear on Wall Street is that the hyperscalers will spend trillions on computing capacity that eventually becomes so abundant they won't be able to charge enough to recoup their costs. More Tech Earnings Coming Next Week Alphabet's upped investment forecast was weighing on its peers' stocks as well Thursday, suggesting capex forecasts could be the Achilles heel of tech stocks as more earnings reports land in the coming weeks. Amazon and Oracle were both down more than 4% in recent trading, while Meta slid 3% and Microsoft declined more than 2%. On the other hand, a few high-profile beneficiaries of AI spending rose, including Sandisk (SNDK) and Micron (MU), each up more than 2%. Alphabet's spending has grown so quickly and become so large that its free cash flow turned negative for the first time in its history last quarter. The company burned through nearly $6 billion as it shelled out $45 billion for property and equipment, a 25% increase from the first quarter. As their free cash flows dwindle, the hyperscalers are selling stock and debt to finance their data center builds, weakening their balance sheets and diluting shareholders in the process. Alphabet last month announced it was issuing up to $85 billion of new stock "to scale AI infrastructure and global compute." Its long-term debt more than doubled to $98 billion in the first half of the year. Spending Concerns Outweigh Strong Results Wall Street's concerns about runaway AI spending overshadowed the positive surprises in Wednesday's report. Notably, Google Cloud revenue -- a proxy for AI demand and the primary target of Alphabet's capex -- grew 82% to nearly $25 billion, blowing past Wall Street's estimates. Its backlog increased by $50 billion to total more than $500 billion. The company said cloud demand is so strong it intends to rent data center capacity from third parties in order to keep adding new customers. Many analysts believe Alphabet is giving investors what they've been demanding for years: evidence of AI's return on investment. "We continue to believe Google is showing returns on AI spending," wrote JPMorgan analysts on Thursday. Google's AI mode "continues to support greater search engagement," while AI-driven improvements are increasing the relevance and value of ads across its platforms, according to JPMorgan. Bank of America analysts argued accelerating cloud growth, expanding cloud margins, and its fast-growing backlog were all clear evidence that investments are already paying off. Experts were surprised by the stock market's reaction on Thursday. "We acknowledge it wasn't a perfectly clean quarter, but bottom line is that the positive surprise from Cloud revs/EBIT more than offsets modest negatives," including slightly soft core search revenue and the expected margin pressure from third-party cloud agreements, wrote Mizuho analysts on Thursday. "We would be buyers of Google shares on the pullback," said JPMorgan. Others saw an informative signal in the market's response. "We're very much in a narrative driven tape," wrote Bernstein analyst Mark Schmulik on Thursday. With investors questioning the strength of its finances and the performance of its frontier AI models, Alphabet "is a tough stock to own," he said.

Alphabet's cash burn raises alarm for Big Tech as AI spending climbs

Alphabet's significant cash burn highlights increasing artificial intelligence spending pressures. Big Tech firms now face higher outlays, impacting profitability and cash flows. Investors anticipate similar spending increases from Microsoft, Meta, and Amazon. Google Cloud's rapid growth adds competitive pressure to rivals in the market. This trend suggests a future where reinvestment is crucial for maintaining market position. Alphabet's first cash burn on record has jolted investors awaiting more Big Tech results next week as soaring AI spending strains one of the world's most profitable companies, and the pain is only expected to increase. The Google parent burned $5.9 billion in the second quarter, even as the cloud unit that rents out AI computing power notched a record 82% growth. With Alphabet now expected to spend $15 billion more in 2026 and predicting another increase next year, the outlays behind the cash burn will only rise. The cash hit is one of the clearest signs of how AI is reshaping Big Tech. Once prized for fat margins and cash gushers that could ⁠easily fund ⁠new bets, the group is now leaning on debt and share sales to bankroll spending, which is set to top $700 billion this year as their cash flows fall short. That will sharpen scrutiny when Microsoft, Meta Platforms and Amazon report results next week. Shares of all three companies were down between 2% and 4% before the bell on Thursday as Alphabet led the slide at 5%. The drop reflects investor concerns that the other tech giants will likely follow Alphabet by raising spending forecasts despite payoffs lagging the pace of outlays. "The risk is tilted towards further increases, particularly while Microsoft and others remain capacity-constrained," Charu Chanana, chief investment strategist at Saxo Markets, said. "But investors will increasingly focus on how much of that cash must be reinvested simply to remain competitive - ⁠and whether AI revenue can grow faster than capital expenditure, depreciation and operating costs." Analysts expect Alphabet and Amazon to burn cash in 2026, while Meta's cash flow is likely to shrink 95.7% to just $1.85 billion. Microsoft, whose current fiscal year will end next June, is expected to ⁠garner $25.39 billion in cash, less than half of the estimated $58.74 billion in the previous financial year. Their capex-to-revenue ratio, a gauge of how much of every sales dollar is being plowed back into spending, is set to nearly double this fiscal year. Meta is expected to hit 54.9% from 35.9%, Alphabet 41% from 23%, Microsoft 45% from 31% and Amazon 25% from 18%. GOOGLE CLOUD GROWTH TO PRESSURE RIVALS Adding pressure to Amazon and Microsoft is also the strong performance of Google Cloud, which has been growing much faster than its bigger rivals in recent quarters in a sign that it could be taking market share. Demand has been so strong that Alphabet executives said they plan to rent out more data-center capacity from other companies to serve their clients, even though it will hurt margins. At least 20 brokerages raised their price targets on Alphabet after Wednesday's results, lifting the median to $430, nearly 26% above the last close. Citizens was the most bullish at $515, while TD Cowen was the most bearish at $240. "Google Cloud was an absolute blow out," said Richard Clode, Portfolio Manager of Janus Henderson Investors' Global Technology Leaders. "Alphabet has competitive ⁠advantage running all the way through the stack from their own custom AI chips through to distribution to billions of users." Growth at Amazon Web Services - the largest cloud provider in the U.S. - is expected to hit 31.04% in the quarter, faster than the 28.4% increase seen in the previous three months. Microsoft, meanwhile, is expected to post growth of 39.98%, on par with the 40% increase seen in January-March quarter. That could weigh on the Windows maker's shares, which have declined by nearly a fifth this year and are the worst performers in the "Magnificent Seven" group of stocks. Competition is also set to deepen as Meta engages in talks to rent out computing power to Anthropic, adding to an industry that already includes AI cloud firms like CoreWeave. "As compute becomes more available and models become cheaper, cloud capacity may look increasingly interchangeable. That could force providers to spend more while accepting lower returns," said Lale Akoner, global market strategist at eToro.

Alphabet Put AI Spending in Focus: Now All Eyes Are on Microsoft And Meta - Meta Platforms (NASDAQ:META),

Alphabet Changed Wall Street's Favorite AI Metric: Microsoft and Meta Are Up Next Investors used to judge AI stocks by three factors: revenue, earnings, and whether those figures beat Wall Street's expectations. For the largest tech companies, that framework is rapidly becoming obsolete. Wall Street has become obsessed with a different line on the financial statements: capital expenditures, or capex. Investors now want to know something far more important: How many billions are they willing to spend to win the AI race? The Hidden Price of AI Spending Google's parent reported $44 billion in capital expenditures during the latest quarter, bringing spending over the past 12 months to $132 billion -- roughly double the level of a year earlier. Management also guided for about $200 billion in Capex over the next 12 months, signaling that the spending spree is far from over. The immediate consequence is the disappearance of the financial metric equity investors have historically prized most: free cash flow. As AI infrastructure spending ballooned, Alphabet's quarterly free cash flow turned negative for the first time in the company's history, underscoring the trade-off at the heart of the AI race. Hyperscaler are increasingly willing to sacrifice today's cash generation in exchange for tomorrow's computing capacity. But investors do not have that luxury to wait. Now the spotlight shifts to Microsoft and Meta, whose earnings this week could determine whether Wall Street believes the AI infrastructure boom is accelerating even further. The Hyperscaler's AI CAPEX Tracker The scale of spending is unprecedented across the group. Consensus estimates suggest that figure will surge to nearly $800 billion over the current fiscal year, exceed $1 trillion the next, and approach $1.33 trillion annually within five years. Among this week's earnings reports, Microsoft and Meta stand out. Microsoft spent approximately $97.2 billion over the last twelve months. Analysts now expect CapEx to climb to $118.9 billion over the next fiscal year, a 22% year-over-year increase, before accelerating to $178.9 billion the following year, another 50% jump. Meta's spending trajectory is even steeper. After investing about $75.8 billion over the past year, consensus expects capex to reach $135.2 billion over the next twelve months -- an eye-catching 79% increase -- before rising another 29% to $174.1 billion the following year. The numbers suggest that investors may spend less time analyzing advertising growth or Azure cloud revenue than examining one figure buried in the cash flow statement. The AI spending race is only beginning. Consensus estimates suggest annual capital expenditures by the world's largest hyperscalers could surpass $1 trillion as early as next year and approach $1.3 trillion within five years. AI Hyperscaler Spending: Current Levels And Five-Year Outlook Image: Shutterstock Market News and Data brought to you by Benzinga APIs To add Benzinga News as your preferred source on Google, click here.

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

Big tech firms are investing heavily in artificial intelligence infrastructure. Their capital expenditures may soon exceed free cash flow generation. Microsoft and Amazon show early AI revenue growth signs. However, investors worry about sustained spending and cash depletion. Oracle's shares have fallen significantly amid negative free cash flow. 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, Alphabet, Amazon, Meta Platforms and Oracle -- 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. 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. WORRIES ABOUT CASH FLOW 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. 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."

Big Tech AI Spending Faces Wall Street Pressure as Investors Question Capex Growth

Wall Street is changing how it judges artificial intelligence spending. Investors once rewarded major technology companies for expanding data centers, buying chips, and building new AI services. Strong revenue growth often eased concerns about the cost. That pattern changed after Alphabet and Tesla reported second-quarter results. Both companies posted sharp share losses after announcing higher spending plans. The reaction showed that investors now want clearer proof that AI investment can support cash flow, margins, and earnings. This shift comes before earnings from Microsoft and Meta on Wednesday, followed by Apple and Amazon on Thursday. Their capex forecasts, cloud growth, and free cash flow will give investors new data on the cost of the AI buildout.

Alphabet's cash burn raises alarm for Big Tech as AI spending climbs

Alphabet's first cash burn on record has jolted investors awaiting more Big Tech results next week as soaring AI spending strains one of the world's most profitable companies, and the pain is only expected to increase. The Google parent burned $5.9 billion in the second quarter, even as the cloud unit that rents out AI computing power notched a record 82 per cent growth. With Alphabet now expected to spend $15 billion more in 2026 and predicting another increase next year, the outlays behind the cash burn will only rise. The cash hit is one of the clearest signs of how AI is reshaping Big Tech. Once prized for fat margins and cash gushers that could easily fund new bets, the group is now leaning on debt and share sales to bankroll spending, which is set to top $700 billion this year as their cash flows fall short. That will sharpen scrutiny when Microsoft, Meta Platforms and Amazon report results next week. Shares of all three companies were down between 2 per cent and 4 per cent before the bell on Thursday as Alphabet led the slide at 5 per cent. * Latest technology news on BNNBloomberg.ca The drop reflects investor concerns that the other tech giants will likely follow Alphabet by raising spending forecasts despite payoffs lagging the pace of outlays. "The risk is tilted towards further increases, particularly while Microsoft and others remain capacity-constrained," Charu Chanana, chief investment strategist at Saxo Markets, said. "But investors will increasingly focus on how much of that cash must be reinvested simply to remain competitive -- and whether AI revenue can grow faster than capital expenditure, depreciation and operating costs." Analysts expect Alphabet and Amazon to burn cash in 2026, while Meta's cash flow is likely to shrink 95.7 per cent to just $1.85 billion. Microsoft, whose current fiscal year will end next June, is expected to garner $25.39 billion in cash, less than half of the estimated $58.74 billion in the previous financial year. Their capex-to-revenue ratio, a gauge of how much of every sales dollar is being plowed back into spending, is set to nearly double this fiscal year. Meta is expected to hit 54.9 per cent from 35.9 per cent, Alphabet 41 per cent from 23 per cent, Microsoft 45 per cent from 31 per cent and Amazon 25 per cent from 18 per cent. GOOGLE CLOUD GROWTH TO PRESSURE RIVALS Adding pressure to Amazon and Microsoft is also the strong performance of Google Cloud, which has been growing much faster than its bigger rivals in recent quarters in a sign that it could be taking market share. Demand has been so strong that Alphabet executives said they plan to rent out more data-center capacity from other companies to serve their clients, even though it will hurt margins. At least 20 brokerages raised their price targets on Alphabet after Wednesday's results, lifting the median to $430, nearly 26 per cent above the last close. Citizens was the most bullish at $515, while TD Cowen was the most bearish at $240. "Google Cloud was an absolute blow out," said Richard Clode, Portfolio Manager of Janus Henderson Investors' Global Technology Leaders. "Alphabet has competitive advantage running all the way through the stack from their own custom AI chips through to distribution to billions of users." Growth at Amazon Web Services - the largest cloud provider in the U.S. - is expected to hit 31.04 per cent in the quarter, faster than the 28.4 per cent increase seen in the previous three months. Microsoft, meanwhile, is expected to post growth of 39.98 per cent, on par with the 40 per cent increase seen in January-March quarter. That could weigh on the Windows maker's shares, which have declined by nearly a fifth this year and are the worst performers in the "Magnificent Seven" group of stocks. Competition is also set to deepen as Meta engages in talks to rent out computing power to Anthropic, adding to an industry that already includes AI cloud firms like CoreWeave CRWV.O. "As compute becomes more available and models become cheaper, cloud capacity may look increasingly interchangeable. That could force providers to spend more while accepting lower returns," said Lale Akoner, global market strategist at eToro.

The AI Boom Meets Its Cost of Capital Moment

The Fed removed the immediate hike but preserved the threat; oil reignited the inflation premium, and the long bond revolted. For an AI complex increasingly dependent on debt, leverage and relentless capital expenditure, a hawkish hold was no relief at all. Takeaways * The Fed removed the immediate July hike premium, but three dissents and Kevin Warsh's inflation message left the broader tightening threat firmly on the table. * The long end delivered its own rate increase as higher oil prices, inflation risk and fiscal unease drove a violent curve steepening. * The AI trade is becoming a balance-sheet story as hyperscaler capital expenditure rises, credit spreads widen and investors question how quickly spending converts into cash flow. * Record technology selling and hedge-fund de-grossing may be approaching exhaustion, but a tactical bounce would not resolve the deeper cost-of-capital problem. The AI Boom Meets Its Cost of Capital Moment Leaving aside the usual algo spasm as the market stripped out the immediate Fed-hike premium, let me be the first to remind everyone of an old trading-floor rule: a hawkish hold is rarely good news for risk assets. It is even less comforting when the asset sitting across the table is the most dominant, capital-hungry and heavily financed investment narrative of the decade. The Federal Reserve did not raise rates. For a few confused minutes, the machines treated that as liberation. Short-end yields fell, the dollar weakened, and equities jumped as though Kevin Warsh had arrived carrying a tray of pauses rather than presiding over a meeting where three officials wanted an immediate hike. The market heard "no hike" and briefly ignored everything that came after the comma. The target range remained at 3.50% to 3.75%, but Cleveland Fed President Beth Hammack, Minneapolis Fed President Neel Kashkari and Dallas Fed President Lorie Logan all dissented in favour of a 25-basis-point increase. Warsh also made clear that leaving rates unchanged was not a declaration of victory over inflation. It was the beginning of the next policy debate, not the conclusion of the previous one. That is not a dovish hold. It is a central bank withholding the bullet while leaving the gun on the table. The difference matters because the market was not facing the Fed in isolation. Oil was surging again as the conflict involving Iran, the United States and regional actors returned to a more dangerous phase. Long-dated Treasury yields were rising, the curve was steepening, and the semiconductor complex was already being dismantled by one of the most aggressive de-grossing episodes in years. The Fed may have left the overnight rate untouched, but the cost of financing the AI boom did not stand still. That is the real story. For most of the past three years, the AI trade has enjoyed the luxury of being judged almost entirely through the prism of demand. Every new data-centre announcement, every larger chip order and every upward revision to hyperscaler capital expenditure was treated as additional proof that the cycle was accelerating. The logic was simple enough: stronger demand justified more spending, more spending supported stronger earnings and stronger earnings allowed the market to extend the valuation runway even further. It was an elegant arrangement while money remained plentiful and the long end behaved itself. The problem is that the same spending cycle looks very different once the bond market begins charging rent. AI infrastructure is being built today against revenues expected to compound for years, which makes the entire ecosystem unusually sensitive to long-duration yields, refinancing costs and the market's willingness to keep capital moving through the system. When those conditions tighten, the debate changes almost immediately. Investors stop asking how large the addressable market might become and start asking how much capital must be consumed before those future revenues begin generating an acceptable return. That shift was visible in the Treasury curve before it was fully understood in equities. The front end initially rallied because the Fed declined to deliver the hike that had been partially embedded in market pricing. Yet while traders celebrated the removal of the immediate event risk, the long end moved in the opposite direction. Oil was climbing, inflation risk had returned to the conversation and the 30-year yield was forcing its way back toward levels the market had not seen in almost two decades. Warsh kept the overnight rate in its chair, but the bond vigilantes walked across the room and tightened policy themselves. For the broader equity market, that was uncomfortable. For the AI complex, it went straight to the heart of the valuation argument. The industry is no longer financed only through current cash generation. It is increasingly being supported by a sprawling architecture of corporate debt, leases, structured financing, supplier credit and enormous capital budgets that assume investors will remain willing to fund the next stage of the buildout before the previous stage has fully proved its economics. That does not make the AI thesis false. It makes the financing terms impossible to ignore. Meta's latest capital-expenditure guidance offered a neat illustration. The company had already raised its expected 2026 spending range to $125 billion to $145 billion, and the latest earnings headlines nudged the lower bound higher again to $130 billion. On the surface, that is a powerful expression of confidence. Companies do not commit that kind of money unless they believe the demand is real and the competitive stakes are enormous. But capital expenditure is not free simply because the strategic rationale is compelling. Each new data centre comes with a financing cost, a depreciation schedule and a return threshold. The market is now being asked to believe that the cash flows will not only arrive, but arrive quickly enough to outrun a rising long-end yield, widening credit spreads and the cumulative weight of the spending already committed. This is where the circularity begins to matter. The better the AI demand story becomes, the more aggressively the hyperscalers must spend to meet it. The more aggressively they spend, the larger the financing requirement becomes. And the larger the financing requirement becomes, the more sensitive the entire trade is to rates, credit and the willingness of investors to continue treating expenditure as a future asset rather than a present liability. The AI boom has spent three years building the most sophisticated factory in history. The market is only now walking around the back and asking who signed the mortgage. Korea was the first place where that question landed with real force. SK Hynix delivered results that would have looked extraordinary in almost any other cycle, yet extraordinary is no longer enough when the market has already priced something close to perfection. Revenue disappointed relative to expectations, Korean equities cracked and the selling spread quickly through the semiconductor complex. What began as an earnings reaction became another round of forced exposure reduction, with momentum portfolios, memory names and the broader AI supply chain caught in the same downdraft. The important point was not that AI demand had suddenly evaporated. It was that the market's expectations had travelled even further than the fundamentals, leaving very little room for anything short of flawless delivery. That pressure then followed the sun into Europe and the United States. The hoped-for broadening trade offered no meaningful protection. Both the capitalisation-weighted and equal-weighted S&P 500 fell, breadth turned sharply negative and the post-Fed Nasdaq rally disappeared almost as quickly as it had arrived. The market was not rotating cleanly from expensive technology into a healthier second tier. It was making the book smaller. Goldman's prime-brokerage data put numbers around the damage. The three-day period through Tuesday produced the largest cumulative hedge-fund de-grossing since November 2022, while global technology recorded the largest three-session long selling in the bank's history going back to 2016. Macro shorts were covered, long exposure was cut and gross leverage came out across sectors, with investors less interested in expressing a new view than reducing the number of ways the old one could hurt them. That flow matters because it explains why the moves have become so violent, but it should not be confused with the underlying cause. Positioning tells us how quickly the market can fall once the trapdoor opens. Funding conditions tell us whether anyone will be willing to step back onto the floor. There are signs that the forced-selling phase is becoming mature. Goldman's desk noted that fundamental long-short funds, which had been steadily reducing exposure since the previous week, had gone largely quiet ahead of the Fed. John Flood described the momentum drawdown as being in its ninth inning, and given the scale of the de-grossing, that is not an unreasonable conclusion. Still, a seller putting down the axe is not the same thing as a buyer reaching for his wallet. The absence of fresh liquidation can certainly produce a tactical bounce, especially when momentum has become deeply oversold and positioning in the Magnificent Seven sits near the lower end of its recent range. A cleaner book means good news can travel further, while strong earnings from Microsoft or Meta can force shorts to cover and persuade underweight investors to rebuild some exposure. But the rebound, if it comes, will be entering a different market from the one that existed before the unwind. Until recently, every additional dollar of AI spending was rewarded as evidence of dominance. Going forward, investors are likely to ask harder questions. What does that dollar cost? How is it financed? When does it begin earning a return? How much of the future cash flow is already spoken for by depreciation, interest expense and the next round of infrastructure spending? Those questions do not kill the AI story. They divide it. The market will become less willing to treat the entire complex as one seamless expression of the same secular theme. Companies already converting AI demand into durable cash generation will separate from those still absorbing capital in anticipation of it. Semiconductor scarcity will no longer automatically justify every valuation. Data-centre demand will be weighed against data-centre profitability, while platform dominance will increasingly be judged alongside balance-sheet efficiency. That is a more discriminating regime, and probably a healthier one, but it will also be far less forgiving. The Fed's hawkish hold did not end the AI cycle. Tehran did not break the technology. Korea did not prove that the demand was imaginary, and the current de-grossing does not mean every AI asset has become uninvestable. What changed is that the market has finally begun reading the financing terms. The debt collector has arrived, the long bond is standing at the door, and another quarterly earnings beat may no longer be enough to send him away.

AI Capex Hits a Tipping Point as Investors Demand More Corporate Discipline

* Secondary offerings surged to a five-year high in Q2, as AI hyperscalers race to raise capital * Despite strong earnings, investors are punishing heavy capex plans, with free cash flow favored over intense investment * A slowdown in equity issuance and AI spending growth could mark an important shift in market leadership during the second half of the year Cash is king. Not for investors right now, but among the hyperscalers. The craving for capital is high as the AI arms race takes new twists and turns. According to Wall Street Horizon's corporate event data universe spanning more than 11,000 global companies, Q2 2026 featured the most secondary equity offerings in five years. The sum (more than 100 announcements) brought the four-quarter figure to above 90 on a per-quarter basis, also the most since 2021. 5-Year High In Secondary Offerings Source: Wall Street Horizon Why is this factoid more than just fascinating for investors? Well, the 180-turn currently being pulled by large companies from around the world is not so shareholder-friendly. Indeed, along with surging secondary issuance volumes, stock buybacks are less en vogue among the most valuable tech firms. Tech-media-telecom's total shareholder yield turns more paltry with each passing week, despite names like NVIDIA (NASDAQ:NVDA) and Microsoft (NASDAQ:MSFT) being the largest dividend payers in market history (high dollar-value payouts, but small yields). The Market Is Voting Against Capex Bookmark the above chart. It could prove to be a warning signal, a yellow flag that companies have become too focused on capex. Market reactions to Q2 earnings reports seem to support that conjecture, with the heavy hitters reporting Wednesday and Thursday nights. "M&M" Microsoft (MSFT) and Meta Platforms (NASDAQ:META) post numbers this afternoon, while "A&A" Apple (NASDAQ:AAPL) and Amazon (NASDAQ:AMZN) issue revenue and profit figures tomorrow after the market closes. These reports come after solid Alphabet (NASDAQ:GOOGL) earnings and Intel (NASDAQ:INTC) results, but those two tech giants saw their respective stock prices decline following financial news hitting the tape. That's been the theme this reporting period: great earnings, lackluster reactions. Is Mr. Market sending a message? That nastygram might be that spending linked to the AI and data-center buildout has blown at least a minor gasket. Step back in time a few quarters, and the zeitgeist was "the more spending the better." Take on debt, issue equity... do whatever it takes to get a leg up on the competition. Not so today. Not only have "capex beats" been punished, but so too has the broad tech sector. Through Monday, the S&P 500 Information Technology Sector ETF (XLK) was pacing for its worst month since September 2022, during what has typically been a bullish calendar stretch. A few weeks ago, we noted that this earnings season could be more like "capex season." While plenty of pivotal reports are not yet in hand, it wouldn't be surprising to see AI hyperscalers chart a course change (not totally reverse ship) in light of how investors are responding to record-setting capex figures. If that's the case, the above chart could be among the initial tells. A drop in secondary equity announcements may reveal at least a modest return to the shareholder-first mindset that dominated the pre-AI era. Apple's Different Playbook Maybe the likes of GOOGL, MSFT, META, AMZN, Oracle (NYSE:ORCL), and even Tesla (NASDAQ:TSLA) & SpaceX (SPCX) will mimic AAPL. As CEO Tim Cook hands the reins over to John Ternus, Cupertino once again claims the crown as the world's most valuable company. Its market cap leapfrogged NVDA's to begin the week as semiconductor-stock selling ramped back up. Apple (by design or by happenstance) has largely stayed on the AI-capex sidelines, choosing to preserve free cash flow and its pristine balance sheet, and it has now king of the hill. It's a clear sign that heavy investment spending is no longer a financial virtue. We'll get all the Q2 details Thursday evening. Watch revenue and earnings, of course, but listen for the company's AI plans (if any) and possible comments from its incoming chief. Semiconductor stocks seem to already be pricing in lighter hyperscaler capex growth rates. The VanEck Semiconductor ETF (NASDAQ:SMH) continues flirting with technical bear-market territory, notching fresh lows dating back to early May this week. While lower spending by the aforementioned mega-caps would boost that group's free cash flow, such a trend would mean lower revenue for NVDA, Broadcom (NASDAQ:AVGO), and likely international juggernauts Taiwan Semiconductor (NYSE:TSM), SK Hynix (SKHY), and Samsung. To be clear, aggregated company forecasts still point to increased capex in the quarters to come. A mere slowing of spending growth compared to current estimates, however, would get a lot of attention. Watch the Early Warning Signals Along with noting secondary equity announcements, be on the lookout for a possible uptick in preliminary updates. IBM's (NYSE:IBM) cautionary pre-announcement earlier this month sent shockwaves through tech, but shares were tame after the full Q2 report was digested. The corporate takeaway? Companies may be better served by waving an early red flag than risking it, and dumping a lackluster report and drastically weak guidance onto the Street. Believe it or not, IBM has rallied almost 10% off its July low as XLK struggles. There's another side to the capital-raising coin. Issuing debt is usually a lower-cost financing method. The downside is that a firm becomes more leveraged, and if operating performance turns south, traders quickly gauge a borrower's credit default swaps for clues on solvency (see: ORCL). We'll leave it to CEOs and CFOs to determine the proper capital structure. As investors and analysts, we have plenty of tools to pick out the winners from the losers, including key updates served up in August as the corporate conference season heats back up. The Bottom Line Secondary issuance announcements have risen to half-decade highs... levels not seen since the speculative boom of early 2021. The AI arms race is at the heart of the matter, though strains on small- and medium-sized companies must also be acknowledged amid rising global interest rates. Keep that secondary issuance chart in your back pocket, and we'll be sure to provide updates as the second half unfolds.

Alphabet's spending prompts investor payoff questions, expert says

STORY: Alphabet's first cash burn on record has jolted investors awaiting more Big Tech results next week as soaring AI spending strains one of the world's most profitable companies, and the pain is only expected to increase. The Google parent burned $5.9 billion in the second quarter, even as the cloud unit that rents out AI computing power notched a record 82% growth. With Alphabet now expected to spend $15 billion more in 2026 and predicting another increase next year, the outlays behind the cash burn will only rise. "The question surrounding Alphabet has been, just how does the investor get paid back from this astronomical spending that's eating up all of the operating cash flows coming into the corporation?" Buchanan wondered. "Now the investors are trying to figure out if [Alphabet] is something that they want to continue to invest in going forward, considering the returns that they've gotten out of the name over the last couple of years, as well as the valuation you have to pay to continue to hold this name going forward," he said.

Did Google and Tesla just break AI trade's bull case? By Investing.com

Investing.com -- Alphabet burned $5.9 billion in free cash flow in the second quarter of 2026 -- its first cash burn on record. Tesla burned another $1.1 billion. Together, the two reports have crystallized a fear that has been building all year: Big Tech's AI infrastructure build-out is consuming capital faster than it can generate returns. Every major hyperscaler in the group traded sharply lower on Thursday. Amazon fell nearly 5%, Meta dropped almost 4%, and Microsoft slid more than 2%. The Philadelphia Semiconductor Index had already fallen more than 20% from its late-June peak before this week's results. The market is no longer asking whether AI spending is justified. It is asking whether the returns will ever arrive in time. The Numbers That Spooked Wall Street Alphabet's Q2 results were not weak on the surface. Revenue came in at $119.8 billion, beating the $116.9 billion consensus. Google Cloud surged to $24.8 billion -- an 82% increase. Yet investors fixated on one line: capital expenditure of $44.9 billion in a single quarter, up 100% year over year. Almost all of it went to AI technical infrastructure. The free cash flow swing was the detail that proved hardest to absorb. Alphabet brought in $39.1 billion in operating cash flow but spent $44.9 billion on capex. The company had long been valued in part on prodigious cash generation; a negative reading -- even a single quarter's worth -- changes the narrative structurally. For the full year, Alphabet raised its capex guidance to $195-205 billion, up from a prior $180-190 billion range, and warned spending would climb further in 2027. CEO Sundar Pichai told investors that "our AI investments are redefining what's possible across every part of our business." The market's response was unambiguous: Alphabet fell more than 3% in after-hours trading, then extended losses into Thursday. Tesla's situation carries different dynamics but the same market signal. Vehicle deliveries of 480,126 beat forecasts, yet automotive gross margin came in at 16.3% against expectations of 18.04%. The cash burn traced directly to surging capex -- $5.8 billion in the quarter, up 142% -- as the company accelerates its AI and robotaxi programs. Elon Musk told analysts: "This is a massive capex year, but I'm confident that all the things that we are investing in will yield incredible returns." Investors responded by sending TSLA down 13.5% on Thursday. The Structural Problem: Capex Is Outrunning Cash Flow What makes the Alphabet and Tesla reports particularly potent is that they are not isolated. A Reuters analysis of consensus estimates found that Microsoft, Alphabet, Amazon, Meta, and Oracle are collectively on track to spend more on capex than they generate in free cash flow by 2027. The gap is stark: capex across those five companies is expected to rise by roughly $534 billion between 2025 and 2027, while operating cash flow grows by only $340 billion over the same period -- about $1.57 of additional investment for every $1 of additional cash flow. This structural shift matters because these companies were historically valued on an asset-light model: software margins, minimal physical infrastructure, and robust free cash flow that funded buybacks and dividends. The AI era is dismantling that model in real time. Bull Case, Base Case, Bear Case Bull case. Alphabet's cloud revenue growth of 82% demonstrates that the revenue engine is responding to the investment. The cash flow dip is transitory: a period of unusually dense infrastructure build-out that compresses near-term FCF but builds a durable moat. If Meta and Microsoft report next week with similarly strong cloud and AI-services revenue growth alongside credible timelines for capex normalization, the selloff may prove just a temporary mishap. Base case. Capex remains elevated but revenue growth keeps pace. The hyperscalers collectively accept lower free cash flow margins through 2027, buyback programs slow, and valuations compress modestly. The sector trades in a range rather than re-rating significantly in either direction. Bear case. If Meta or Microsoft miss on cloud revenue while guiding capex higher, the market could reinterpret Alphabet's cash burn not as a temporary inflection point but as the leading edge of a sector-wide profitability squeeze. The Philadelphia Semiconductor Index's 20% decline from its peak already suggests investors are primed to punish any signal that AI monetization is lagging the build-out cost. What to Watch Next Week Meta reports on July 29 with capex guidance of $125-145 billion for 2026, up from roughly $70 billion in 2025. Analysts expect Q2 revenue of around $60 billion and EPS of $7.19. The swing factor is whether ad revenue growth can offset the capex squeeze on margins. Microsoft also reports on July 29, with plans for $190 billion in fiscal 2026 capex. Cloud revenue reached $54.5 billion last quarter, up 29% year over year, with AI annual run rate hitting $37 billion, growing 123%. The company carries a $627 billion contracted backlog that could convert to revenue on schedule -- the strongest revenue visibility in the group. Amazon follows on July 31. Investors will focus less on AWS revenue than on whether Amazon provides any timeline for when its own AI spending cycle peaks. Bottom Line Alphabet's first-ever cash burn and Tesla's deepening negative FCF are not isolated events. They are the leading indicators of a sector-wide transformation: the software era's asset-light model is giving way to the AI era's infrastructure-heavy reality. The hyperscalers are collectively spending $1.57 on capex for every $1 of additional operating cash flow they generate. That math works only if the revenue follows. The market is no longer willing to take that on faith. Next week's reports from Meta, Microsoft, and Amazon will determine whether this week's selloff was a healthy reality check or the beginning of a broader revaluation.