The photo shows the logos of big tech companies called GAFAM for Google, Apple, Facebook, Amazon, and Microsoft on June 2, 2023.
Sebastian Bozon | AFP | Getty Images
Tech giants are collectively making a multitrillion-dollar bet that infrastructure investments will deliver years of profitable growth. But that’s all in the future.
For now, they rely on legacy businesses such as online advertising, business software and e-commerce to fund their artificial intelligence ambitions.
This quarter’s earnings revealed new levels of strain on these core businesses and served as an early test of whether these companies can sustain the spending over time. meta I participated alphabet and Amazon Exit by reporting negative free cash flow microsoft As the only hyperscaler that maintains a positive attitude in this space.
Meta’s free cash flow was negative $2.12 billion, while Amazon’s outflow rose to $42.4 billion and Alphabet’s outflow reached $9.07 billion. Microsoft’s cash generation has fallen sharply for the second straight quarter, this time by 27% to $18.63 billion, but the company said it will now turn to the debt market as it continues to ramp up spending on AI infrastructure.
Hyperscalers’ gains over the past two weeks have coincided with growing concerns about the health and stability of the broader AI sector. Rising interest rates are increasing borrowing costs for companies, putting pressure on the cash-hungry neo-crowd that has become essential to global economic growth.
The tech giants have a cushion that NeoCloud and other players don’t have, but investors will ultimately need historic spending rates to turn them into huge new revenue streams. Stocks have been hit hard this week, with Alphabet suffering its steepest decline in history on Thursday and Amazon falling in extended trading after the news.
Amazon said growth has slowed in both its retail and advertising businesses. Online sales rose 2% from a year earlier, slowing from 10% a year earlier and falling short of analysts’ expectations. Amazon’s midpoint revenue estimate was below analysts’ expectations of $244.5 billion, a particularly disappointing figure for a quarter that included the holiday season.
Amazon, meanwhile, expects capital spending to reach $220 billion this year, and analysts expect that number to top $280 billion next year as the company continues to generate negative free cash flow, according to FactSet.
At Meta, investors have responded positively to the company’s early success with its Muse AI agent app and related underlying model, which could provide a new revenue stream beyond advertising.
But while the company continues to spend on data centers and computing equipment, it will take time for these initiatives to have a significant impact on its overall business. The company said capital spending could reach up to $145 billion this year, and analysts expect it to rise to more than $210 billion in 2027 as the cash flow hole deepens.
Investors sent Meta shares down 7% after last week’s earnings report, even though the company beat sales. Following the report, Meta announced on Monday that it plans to raise a total of $95 billion in equity to support AI investments.
“I’ll borrow it for now.”
Alphabet’s report worried investors the most.
The company’s core search business has seen slowing growth for the third straight quarter, falling short of analysts’ expectations and highlighting the challenges the company faces with the rise of ChatGPT, Claude and other AI-powered bots and agents. YouTube-related advertising revenue has also been revealed.
Evercore analyst Mark Mahaney said Wednesday on CNBC’s “Closing Bell Overtime” that while Google’s strong cloud revenue is “good news” for the company, the slowdown in its digital advertising business is “overwhelmingly bad news.”
Forrester analyst Tracy Wu said in an email that while “Alphabet’s massive capital investment in infrastructure is acceptable for now,” the company is “walking a fine line” as online ad sales are not growing.
“The weaker-than-expected revenue performance of search and YouTube has raised concerns that AI will replace the company’s biggest revenue source,” Woo said. “The problem is not so much the lack of current revenue expectations as the potential for future AI spending to grow faster than the expected franchise cash generation to support it.”
But not everyone is worried. Bullish investors argue that the tech leaders have long operating histories and legacy businesses that are powerful enough to support them for the foreseeable future.
Christopher Ballard, managing director at Check Capital Management, said Alphabet’s $9 billion in negative free cash flow is small compared to the company’s overall business. Operating income for the quarter exceeded $40 billion.
While AI modeling companies OpenAI and Anthropic remain unprofitable and spend billions of dollars a quarter on infrastructure, Ballard said Alphabet has a strong balance sheet.
“They’re borrowing money for now to invest in the future,” Ballard said. “I think it’s OK and I think they’re doing it in a responsible way.”
Hyperscalers did not provide specific capital spending projections for next year, but they signaled that data center spending will continue to rise, even if they report unpleasant metrics.
“Wouldn’t it be more convenient if this kind of acceleration and opportunity happened over 25 years and you could spread out your capital investment over 25 years?” Amazon CEO Andy Jassy said on Thursday’s earnings call. “Well, that might be more convenient, but that’s not the world we live in, and we don’t have that opportunity.”
Caution: This could be the worst earnings reaction for Google as a publicly traded company.
