The latest round of big tech earnings delivered a sobering reminder that the AI spending race is exacting a heavy toll on corporate balance sheets.
Meta kicked off the latest series of reports, reporting a 26% revenue growth and forecasting further acceleration – yet its shares barely moved as investors looked past the strong results to focus on the company’s AI spending plans for 2027.
The rest of this week has proven to be a more turbulent affair, as investors wrestled with the eye-watering cost of the AI infrastructure arms race.
Alphabet: Cracks in the foundation
On paper, headline numbers were strong, with revenue increasing by 25% year-on-year to £127.6bn and operating income up 30% to $40.6bn – Alphabet’s 13th consecutive quarter of double-digit revenue growth.
Google Cloud was the standout, with revenues more than doubling to $30.7bn as AI infrastructure demand surged. Operating margins also expanded from 23.7% to 36.2%.
However, Alphabet missed consensus estimates for both revenue and earnings per share – revenue fell short of the $127.9bn expected, while earnings per share of $2.12 came below the $2.87 forecast.
Russ Mould, investment director at AJ Bell, said vast spending on AI will be tolerated by investors if companies’ earnings are unblemished – “this is where Google-owner Alphabet has fallen down”.
More damaging still was the performance of Google Search, which generated $63.4bn, with year-on-year – missing analysts forecasts of closer to $65bn – with year-on-year growth slowing to 12% from 17% in the second quarter, fuelling fears that AI competitors are beginning to erode Google’s dominance in online advertising.
“There are clear signs that Google’s chatbot-style ‘AI mode’ is hurting traditional search and while there was always likely to be a transition here, the deceleration in growth is still causing real disquiet,” Mould said.
Free cash flow also turned sharply negative to -$9.1bn, as capital expenditure (capex) more than doubled year-on-year to $51.4bn. Analysts do not expect free cash flow to return to positive territory until 2028, a stark reversal from the $73bn generated last year.
The market reaction was severe, as Alphabet’s share price fell around 12%.
Neil Wilson, UK investor strategist at Saxo, said a share price drop of this size “blows a big hole in all the major indices, it’s not a pretty picture”.
“Google needs AI answers to continually improve to keep people coming back but it earns less on those queries than on traditional search,” he said.
“But the fact that core search is under pressure from AI is not a sign that the AI ecosystem is struggling – in fact, it could be seen as a major positive for a continued bull thesis.”
Amazon: A mixed bag
Amazon’s third-quarter results sent the stock tumbling around 6% in after-hours trading, as the company announced record profitability on one hand and eye-watering capex on the other.
Total revenue rose 12% year-on-year to £201.9bn, narrowly missing analyst forecasts of over $202bn, while earnings per share of $1.89 fell short of expectations closer to $2.
AWS was the clear bright spot, with revenue surging 39% year-on-year to $46bn, while total operating income jumped 61% to $28.1bn, delivering an operating margin of 13.9%.
Andrew Hollingworth, founder and fund manager at Holland Advisors, said: “Through AWS, Amazon provides critical functionality to some of the world’s largest and most important organisations, putting it in a prime position to become the world’s trusted supplier of AI business solutions.”
Yet the scale of AI infrastructure spend is beginning to alarm investors. Free cash flow swung to a $42.4bn negative for the quarter, as Amazon maintained its full-year capex guidance of $220bn.
“Much of the debate around Amazon’s AI investment has focused on the sheer scale of its capex and the short-term impact on free cash flow,” Hollingworth said.
“However, we believe investors risk overlooking the huge long-term opportunity this spending represents.”
Despite the impact of near-term free cash flow, Hollingworth said the company’s ability to reinvest substantial amounts of capital at attractive rates of return is “what makes businesses like Amazon so compelling to long-term investors”.
“We see AI as a potential turbo drive to AWS’s growth rates, both in pace and duration, and believe there could be a long road of capital compounding ahead,” he said.
For the fourth quarter, the company has forecast revenue of between $240bn and $247bn.
Microsoft: Stronger and steadier
Microsoft beat expectations on both earnings and revenue in its fiscal first quarter, reporting adjusted earnings of $4.89 per share on revenue of $92.3bn.
The star was Microsoft’s Azure cloud computing business, which reported a revenue growth of 48% year-over-year – ahead of analyst expectations – with guidance of 49% growth next quarter. Azure has become the company’s single largest business division.
Immediately following the strong headline results, Amazon stock surged around 3%, briefly approaching $546-$550 per share.
Mark Sloan, senior analyst at Stonehage Fleming Global Best Ideas Equity fund, said: “The key takeaway for investors from Microsoft’s result is that monetisation of its substantial investments in compute and infrastructure is coming through strongly, with its core engines of Azure and Microsoft 365 both performing ahead of expectations.”
Microsoft 365 commercial cloud growth accelerated to 19%, supported by ramping enterprise adoption of Copilot.
However, capex hit $45.2bn, which came in below market expectations of over $50bn, with investors questioning what lower-than-expected AI infrastructure spend might mean for semiconductor demand.
Microsoft’s chief financial officer Amy Hood explained that lower-than-expected spending was due to delays in third-party capacity deliveries but said capex will accelerate above $50bn in the next quarter as delayed hardware and capacity come online.
“Whilst capex is guided by [Hood] to be very substantial at $170bn in this fiscal year, the strong revenue metrics do support the case for investing and the extent of the capex should leave free cash flow still positive for the year, as previously promised,” said Sloan.
He added that AI is also helping Microsoft drive internal efficiencies, as exemplified by the recent news of a voluntary exit offer to around 60,000 employees, over 25% of its global workforce.
“We believe this could support earnings power through material cost savings,” Sloan said.