Cash burn emerged as a key metric for investors assessing Big Tech earnings this season, as companies ramp up spending on artificial intelligence infrastructure while borrowing costs remain elevated.
Results from major technology companies over the past two weeks intensified concerns about whether the billions of dollars being poured into AI can generate returns quickly enough to justify the investment.
Investors were seen increasingly distinguishing between companies that can finance their expansion through operating cash flow and those whose spending is putting pressure on their balance sheets.
Microsoft was rewarded for demonstrating that it can fund its ambitions without continuously tapping capital markets.
Alphabet, Amazon and Meta, meanwhile, faced pressure as their expanding infrastructure budgets weigh on free cash flow.
More than $2 trillion in market value is set to be wiped from the tech-heavy Nasdaq 100 this month, according to Reuters, as investors reassess the sustainability of the AI investment boom.
Alphabet, Amazon and Meta face cash flow pressure
Alphabet’s latest results highlighted the growing tension between AI investment and the financial performance of its established businesses.
Google Cloud revenue more than doubled to $30.71 billion, demonstrating strong demand for AI-related services.
However, the company’s free cash flow turned negative by $9.07 billion, substantially worse than the $2.70 billion analysts had expected.
Investors were also concerned about slowing growth in Google Search, which remains the company’s largest source of revenue and helps finance its AI expansion.
Search advertising growth slowed for a third consecutive quarter and missed analyst expectations, while YouTube advertising revenue also came in below estimates.
Alphabet shares plunged 13% on Thursday, wiping out approximately $500 billion in market value in its worst single-day decline.
Amazon also came under pressure after reporting a substantial cash outflow despite delivering strong growth at its cloud computing business.
The company burned $42.4 billion on a trailing 12-month basis in the September quarter, driven by capital expenditure of $77.26 billion, around $20 billion above estimates, according to LSEG data.
This compared with cash burn of $7.6 billion in the previous quarter and positive free cash flow of $14.8 billion in the year-earlier period.
Amazon Web Services revenue increased 39% to $46 billion, beating expectations for growth of 38.2%.
However, the strong cloud performance did little to offset concerns about the company’s spending commitments and weaker retail outlook.
“The free cash flow looks like the ugly part of the report,” said Dave Wagner, portfolio manager at Aptus Capital Advisors in a Reuters report.
“Operations generated plenty of cash but their capex just absolutely swallowed it.”
“The trend is pretty steep and pretty negative, and that’s the big thing that is alarming in this report.”
Amazon has forecast capital expenditure of $220 billion for this year as it expands its AI infrastructure and develops related services.
Its shares fell around 2% on Friday.
Meta has also faced investor scrutiny after reporting negative free cash flow of $2.12 billion in the third quarter.
The company raised the lower end of its full-year capital expenditure forecast to $135 billion from $130 billion, while maintaining the upper end at $145 billion.
Microsoft stands out with stronger cash generation
Microsoft offered a contrasting picture, demonstrating that substantial AI investment does not necessarily have to come at the expense of cash generation.
The company reported 48% growth in its Azure cloud business in the fiscal first quarter ended September and generated $18.6 billion in free cash flow, approximately $10 billion above analyst expectations.
The results provided evidence that its investments in AI infrastructure and cloud capacity are translating into stronger business growth while leaving sufficient cash to support further expansion.
“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, in a Reuters report.
The difference is also reflected in their financing activities.
While Microsoft has started raising capital through debt, its issuance has been considerably smaller than that of some competitors this year.
Google has raised more than $140 billion through debt and equity offerings, while Meta has raised $62.5 billion and Amazon has garnered $98 billion through bond deals.
With interest rates making borrowing more expensive, companies that depend heavily on external financing could face greater pressure to demonstrate that their investments are generating adequate returns.
Core businesses also face growth challenges
Another concern for investors is that the enormous spending commitments are coinciding with signs of weakness in some of the companies’ established businesses.
Amazon reported slower growth in both its retail and advertising operations.
Online sales increased 2% year over year, down from 10% growth a year earlier and below analyst expectations.
Its fourth-quarter revenue guidance also disappointed, with the midpoint falling below analysts’ estimate of $244.5 billion, despite the period including the holiday shopping season.
Alphabet’s search business has also shown signs of slowing as competition from ChatGPT, Claude and other AI-powered chatbots and agents intensifies.
Revenue in the search and other segment grew 12% from a year ago to roughly $63 billion, but came in below estimates for the second straight quarter
The company has to invest heavily in AI while protecting the search business that has historically funded much of its expansion.
These developments have raised questions about whether AI-related growth can compensate for potential pressure on legacy revenue streams.
What experts say about the FCF issue
According to a Morgan Stanley report, companies create value when they invest in projects that generate returns above their cost of capital — the minimum return investors expect for providing funds.
In such cases, the future free cash flows (FCF) generated by the investments more than offset their initial cost, increasing the overall value of the business.
“In other words, a company with opportunities that promise sufficient returns should invest in all of them because those investments create value,” wrote Michael J. Mauboussin and Dan Callahan, CFA.
The report cited Walmart’s financial performance between 1973 and 1986 to illustrate this principle.
The retailer recorded negative free cash flow in each of those 14 years, but its average annual return on invested capital (ROIC) was 18%, comfortably above its cost of capital.
“Walmart created value by investing more than it earned. That paid off, as the stock produced an annual total shareholder return of 33 percent during that period, three times that of the S&P 500,” they said.
Hence, some strategists believe the recent sell-off reflects a period of reassessment rather than a fundamental deterioration in the technology sector.
Matt Orton, chief market strategist at Raymond James Investment Management, said the underlying fundamentals remained strong, even as investor positioning in technology stocks became increasingly crowded.
“Our playbook this year has been not to chase a lot of these trades higher, but really to use downside opportunistically,” Orton said in an interview with CNBC.
He also argued that negative free cash flow at major technology companies could be temporary as they invest in capacity to meet rising demand.
Orton said he is “generally okay with these companies turning into negative free cash flow territory because it’s going to be a temporary period.”
Other investors are also less concerned about the cash burn at established technology companies, arguing that their existing businesses and balance sheets provide a cushion that smaller AI companies lack.
Christopher Ballard, a managing director at Check Capital Management, said Alphabet’s negative free cash flow of around $9 billion was relatively small compared with its overall business, with operating income exceeding $40 billion in the quarter.
Unlike AI model developers OpenAI and Anthropic, which remain unprofitable and spend billions of dollars on infrastructure, Alphabet has an established business and a strong balance sheet, he said.
“They’re borrowing from the for-now in order to invest in the future,” Ballard said.
“I think it’s OK, and they’re doing it in a responsible manner.”
The contrasting views underline the debate facing investors.
While Big Tech companies may have the financial resources to sustain heavy AI investment for now, markets are increasingly demanding evidence that the spending will produce durable growth and sufficient cash returns to finance the next phase of expansion.
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