Key Points
- Alphabet, Microsoft, and Meta plan to increase capital spending on AI chips and data centers.
- Investors reacted positively to Alphabet’s report (shares up 7.3%) but negatively to Microsoft (-3%) and Meta (-7%).
- Alphabet’s ability to fund its AI investments with strong cash flow, with capital expenditure at 49% of cash generated, reassured investors.
- Meta (64.6%) and Microsoft (77.5%) reported higher capital expenditure ratios relative to cash generated from operations, raising investor concern.
On Wednesday, three of the largest U.S. technology companies signaled plans to increase capital spending next year. However, investors seemed most confident in Google-parent Alphabet’s ability to fund these big plans using its own cash.
Alphabet, Microsoft, and Facebook-owner Meta all announced they would increase their annual capital expenditures, pouring money into chips and data centers.
Shares for all three companies have risen significantly this year, as everyone expects them to be winners in the AI race. But investors cheered Alphabet’s report, while pushing down Microsoft by 3% and Meta by 7% in premarket trading. This happened because investors carefully considered the costs of each company’s investments.
All three reported excellent revenue growth in their main businesses. Analysts say a key reason for Alphabet’s positive reception is its ability to balance soaring expenses with strong cash flow.
Dave Heger, a senior equity analyst at Edward Jones, commented, “I would think that comes into play – to have capital spending be a lower percentage of revenue and cash flow. That may give investors more comfort. All the players are ramping up spending pretty dramatically, and there’s been a lot of concern about pressure on free cash flow.”
Alphabet’s capital expenditure of $23.95 billion in the September quarter represented 49% of the cash it generated from operations. For Meta, this percentage was 64.6%, and for Microsoft, it was even higher at 77.5%. Josh Gilbert, a market analyst at eToro, noted, “Ongoing investments in data centers and AI infrastructure are a theme we’ve seen across Big Tech this earnings season. But unlike some of its peers, Alphabet is more than covering that spend with cash flow, and it’s firing on all cylinders.”
Investors are becoming cautious about AI spending, especially since big tech companies aren’t clearly stating how much AI contributes to their revenue and profit. With multi-billion-dollar deals happening across the AI industry, investors are also wary of a tangled web of circular investments.
Despite these concerns, executives insisted they must spend to keep up with the demand for AI computing power. Meta CEO Mark Zuckerberg said that even if the company over-invests in AI, they would experience “some loss and depreciation, but we’d grow into that and use it over time.” Dan Morgan, a portfolio manager at Synovus Trust, explained that companies with stronger cash flow can afford to invest more aggressively in AI infrastructure because they can handle lower returns on those big outlays.
Amazon, another major cloud computing provider, will offer more insight into AI investment and returns in the tech sector when it reports its third-quarter earnings on Thursday.
