Cash is king, as investors draw new battle lines in AI spending boom

By Aditya Soni and Deborah Mary Sophia

Oct 29 (Reuters) – Cash flow is king again.

Wall Street rewarded Microsoft and Oracle for showing that they could fund their enormous AI ambitions without endlessly tapping investors.

Alphabet, by contrast, was punished for burning through cash, while Google Search’s slower growth fanned fears that competition was hurting the business that bankrolls its AI expansion. Amazon shares, too, sold off after it reported a massive third-quarter cash burn and a muted fourth-quarter outlook, despite posting the fastest cloud revenue growth in nearly five years.

Alphabet shares fell more than 12% on Thursday, recording their worst day ever, wiping out roughly $500 billion in market value.

Amazon slipped more than 6% in after-hours trading following its earnings report.

Microsoft shares ended Thursday’s session almost flat, paring earlier gains, after a report said it was seeking to raise $25 billion in its first US investment-grade bond sale in more than nine years.

The contrasting response to their results showed that after rewarding companies for spending aggressively to secure computing capacity — often through debt — investors are demanding more evidence that the resulting growth can finance the next round of outlays.

Meta offered an early warning last week, when better-than-expected revenue growth and an upbeat outlook were eclipsed by its cash burn.

Oracle, on the other hand, ended regular trading nearly 11% higher on Wednesday after Larry Ellison’s company said it was planning to put a ceiling on external financing and expected to turn its cash flow positive in the second half of fiscal 2028.

“Across all four hyperscalers, we saw there is growth in the cloud business and in demand for AI tools. But in terms of running the business of the business, Microsoft seems to be the only one that’s able to do all of this and still (generate cash) at the same time,” said Brian Mulberry, chief market strategist at Zacks Investment Management.

While Microsoft is also starting to raise capital through debt, the sale is still much smaller than its peers so far this year. Google has raised more than $140 billion through debt and equity offerings, while Meta has raked in $62.5 billion and Amazon has garnered $98 billion via bond deals.

Amazon burned $42.4 billion through the 12 months ended September 30, and reported much bigger-than-expected capital spending of $77.26 billion in the third quarter. CEO Andy Jassy said it would spend “meaningfully more” in 2027, on top of a massive $220 billion bill this year.

“The headline numbers matter less than the cash story underneath them … Amazon landed as a double disappointment, paired with guidance that did little to reassure investors already rattled by Alphabet’s plunge earlier in the day,” said Jesse Cohen, senior analyst at Investing.com.

Still, to assuage concerns, Amazon pointed to triple-digit growth in its AI business, with Jassy saying he has “even more conviction than we already had” that its investments will yield a much larger free cash flow generating business.

Alphabet, meanwhile, poured 121.4% of its operating cash flow into capital spending in the September quarter, compared with 68% by Microsoft, excluding finance leases.

A lower ratio leaves more cash for buybacks, dividends or paying down debt. A ratio above 100% means a company is spending more than its operations generate and must make up the gap with reserves or borrowing.

“Alphabet and Microsoft were night and day,” said Melissa Otto, head of research at S&P Global Visible Alpha.

“Microsoft’s quarter demonstrated very disciplined growth, whereas Google is burning cash and its core business came in below expectations,” she said, adding that it may lead investors to question “is AI taking some share” from Google Search.

Google’s search revenue growth also slowed to 12% in the September quarter, falling short of expectations for a 14.7% increase, even as CEO Sundar Pichai said queries were growing at their fastest pace in five years.

The long-lucrative business is under threat from AI chatbots and agents that are changing how people search for information, just as the company pours more money into the technology. Capital expenditure will increase significantly in 2027, CFO Anat Ashkenazi told analysts.

CLOUD BOOM, CASH SQUEEZE

Alphabet’s eyebrow-raising capital outlay — with as much as $205 billion expected this year — is, however, driving gains at Google’s other major AI business.

Google Cloud revenue more than doubled to $30.71 billion, but Alphabet’s spending overwhelmed that growth. Cash burn hit $9.07 billion after the company posted its first quarter of negative cash flow in the June period.

“This is definitely a different business, Google. It’s a different business today than it was three, five, 10 years ago,” said Jeremy Saltzberg, vice president and senior investment officer at Check Capital, which owns Alphabet shares.

Saltzberg pushed back on the concerns about spending, saying Alphabet needed to have big outlays to stay competitive at a time when OpenAI and Anthropic appear to be pulling ahead in Silicon Valley’s AI model race.

“We think this is a sport of kings, which is that if you don’t have $150 billion to spend next year on capital expenditure, don’t even bother showing up,” Saltzberg said.

MICROSOFT’S CASH FLOW ADVANTAGE

Microsoft offered a stark contrast. The company generated $18.6 billion in free cash flow in its fiscal first quarter, nearly $10 billion more than Wall Street expected, even as it poured $45.2 billion into expanding its computing infrastructure.

Revenue at its Azure cloud business surged a better-than-expected 48% and the company forecast faster-than-expected cloud growth for the current quarter.

The results also suggested Microsoft was finding a broader market for AI beyond a handful of deep-pocketed customers, including OpenAI, whose heavy computing requirements have fueled the industry’s expansion.

“The shiny object stuff is waning” as more businesses move beyond experimenting with the newest or most powerful AI models and commit to long-term contracts, Microsoft CEO Satya Nadella said in a conference call with analysts.

“I want the breadth,” he said. “We have large customers who want to buy from us … As long as the pricing is right, we may sell them some. If not, we will be patient about building the breadth business.”

(Reporting by Aditya Soni and Deborah Sophia in Bengaluru; Editing by Sayantani Ghosh, Thomas Derpinghaus, Arun Koyyur and David Gaffen)