Tech megacaps lean on core businesses to fund AI spending surge

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Tech megacaps fund AI spending

Highlights

Meta, Amazon, and Alphabet report negative free cash flow due to surging AI infrastructure spending, while Microsoft's free cash flow drops 27% to $18.63 billion.
Amazon forecasts capital expenditures of $220 billion in 2024 and over $280 billion in 2025, maintaining heavy investment despite ongoing negative free cash flow.
Meta announces plans to raise $95 billion in stock for AI investments as shares fall 7% post-earnings, and Alphabet faces heightened investor concern amid slowing core search and YouTube ad revenue.

Cash flow pressure builds across hyperscalers

As reported by CNBC, the latest quarterly results from major hyperscalers show AI-related infrastructure spending is weighing heavily on cash generation even as their established businesses remain the main source of funding. Meta, Alphabet and Amazon all report negative free cash flow, while Microsoft remains positive but says it is turning to the bond market as it continues expanding AI infrastructure investment.

Meta posts negative free cash flow of $2.12 billion, Amazon's outflows widen to $42.4 billion and Alphabet's reach $9.07 billion. Microsoft's free cash flow falls 27% from a year earlier to $18.63 billion, marking a second straight quarter of sharp decline.

The pressure comes as rising interest rates make debt financing more expensive across the broader AI sector. That is adding strain not only to large technology groups but also to cash-burning neocloud companies that are becoming important to the global AI buildout.

Although the hyperscalers have stronger balance sheets than many smaller AI players, investors are looking for these historically high spending levels to translate into sizable new revenue streams. Market nerves are visible this week, with Alphabet suffering its steepest-ever drop on Thursday and Amazon falling in extended trading after its earnings report.

Legacy engines face a tougher growth test

Amazon says growth slows in both retail and advertising, highlighting the risks of depending on mature businesses to finance aggressive investment. Online sales rise 2% year over year, slowing from 10% a year earlier and missing analyst estimates, while the midpoint of its revenue guidance is below the $244.5 billion expected by analysts for the holiday quarter.

Amazon expects capital expenditures to reach $220 billion this year, and analysts surveyed by FactSet project that figure will exceed $280 billion next year. The company is continuing to spend heavily even as free cash flow remains negative.

At Meta, investors respond positively to early traction for the Muse AI agent app and related foundation models, which could eventually diversify revenue beyond advertising. But the company says capital expenditures will reach as high as $145 billion this year, and analysts expect that number to surpass $210 billion in 2027 as cash flow pressure deepens.

Meta shares fall 7% after last week's earnings report despite a revenue beat. The company then announces on Monday that it plans to raise a total of $95 billion in stock to support its AI investments.

Alphabet draws the strongest investor concern as its core search business posts a third straight quarter of slowing growth and misses analyst projections, while YouTube advertising revenue also comes in below expectations. Mark Mahaney, an analyst at Evercore, says on CNBC's "Closing Bell Overtime" that strong cloud revenue is "good news" for Google, but slowing digital advertising is "the overwhelming bad news."

Forrester analyst Tracy Woo says Alphabet's heavy infrastructure spending has been tolerated so far, but the company is "walking a fine line" because of ad sales misses. She says weaker Search and YouTube revenue relative to expectations increases concern that AI displacement could hit Alphabet's largest revenue drivers, and that future AI spending may outpace the cash generation of the businesses meant to support it.

Some investors remain comfortable with the strategy. Christopher Ballard, managing director at Check Capital Management, says Alphabet's negative free cash flow is small relative to its overall scale, noting that quarterly operating income exceeds $40 billion, and argues the company is borrowing from current strength to invest responsibly for future growth.

The hyperscalers do not provide detailed capital expenditure outlooks for next year, but all indicate that data center spending continues to rise. Amazon CEO Andy Jassy says on Thursday's earnings call that a slower, more gradual investment cycle might be more convenient, but that is not the market opportunity the company faces.

In our earlier coverage of the U.S. AI data center buildout, we highlighted how surging infrastructure ambitions are colliding with higher financing costs, construction delays, and power constraints. That report noted that a sizable share of planned projects is being questioned as credible, while market volatility and cost overruns are making it harder for developers to raise capital. The takeaway was that the key risk is no longer demand, but whether massive AI infrastructure plans can be delivered on time and converted into sustainable returns.

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