Alphabet's cash flow turns negative for the first time AI capital expenditure pressure tests tech giants' financial reports
As the first hyperscale cloud vendor to release its second quarter report, Google parent company Alphabet's cash flow turned negative for the first time in history, exacerbating investors' concerns about the technology giant's excessive capital expenditures. Rapidly rising spending on artificial intelligence (AI) is putting pressure on one of the world's most profitable companies, and that pressure is expected to intensify further. Although Google Cloud achieved record growth of 82% in the second quarter, Alphabet still burned $5.9 billion in cash during the quarter.
As the first hyperscale cloud vendor to release its second quarter report, Google parent company Alphabet's cash flow turned negative for the first time in history, exacerbating investors' concerns about the technology giant's excessive capital expenditures. Rapidly rising spending on artificial intelligence (AI) is putting pressure on one of the world's most profitable companies, and that pressure is expected to intensify further. Although Google Cloud achieved record 82% growth in the second quarter, Alphabet still burned through $5.9 billion in cash during the quarter. The market expects Alphabet to increase expenditures by an additional US$15 billion in 2026, and has forecast that expenditures will continue to grow next year, which means that investments that lead to a deterioration in cash flow will only expand further. The pressure on cash flow is one of the most obvious signs that AI is reshaping the financial situation of large technology companies. In the past, these companies were able to easily fund new businesses with strong profit margins and abundant cash flow; now they are increasingly relying on debt financing and selling stocks to support AI investments. These companies are expected to spend more than $700 billion on AI this year, and operating cash flow is no longer enough to cover related investments. This trend will put more attention on the financial reports released by Microsoft, Meta and Amazon next week. Microsoft, Alphabet, Amazon, and Meta are all hyperscalers. Alphabet's stock price fell 5% before the U.S. stock market opened on Thursday, dragging down Microsoft, Meta and Amazon's stock prices by 2% to 4%. The stock price decline reflects investor concerns that other technology giants are likely to follow Alphabet and raise capital expenditure forecasts, while returns from the AI business still lag behind investment growth. Charu Chanana, chief investment strategist at Saxo Markets, said: "The risk remains biased towards further increases in spending, especially as companies such as Microsoft remain constrained in their computing power." "But investors will increasingly focus on how much cash these companies need to reinvest just to stay competitive; and whether AI revenue can grow faster than capital expenditures, depreciation and operating costs," Chanana added. Analysts predict that Alphabet and Amazon will experience negative cash flow in 2026; Meta's cash flow may drop 95.7% year-on-year, leaving only $1.85 billion. Microsoft is expected to generate $25.39 billion in cash flow this fiscal year, which ends in June next year, less than half of the $58.74 billion estimated in the previous fiscal year. The companies' "capex-to-revenue ratio" is expected to nearly double this fiscal year. Among them, Meta will increase from 35.9% to 54.9%, Alphabet will increase from 23% to 41%, Microsoft will increase from 31% to 45%, and Amazon will increase from 18% to 25%. The Capex-to-Revenue Ratio is used to measure the proportion of sales revenue that a company reinvests into capital expenditures. Google Cloud's rapid growth puts pressure on competitors Meanwhile, Google Cloud has recently been growing significantly faster than its larger rivals, suggesting it may be grabbing market share, further increasing pressure on Amazon and Microsoft. Due to strong demand, Alphabet executives said they plan to lease more data center capacity to other companies to meet customer demand, although this will compress profit margins. After Alphabet reported earnings on Wednesday, at least 20 brokerages raised their price targets, with the median price target rising to $430. Among them, Citizens gave the most optimistic target price of $515, and TD Cowen was the most conservative, only $240. Richard Clode, portfolio manager of the Janus Henderson Investors Global Technology Leaders Fund, said: "Google Cloud's performance is extremely impressive. Alphabet has competitive advantages throughout the entire industry chain, from self-developed AI chips to distribution channels for billions of users."
Analysts predict that the revenue growth rate of Amazon Cloud Technology (AWS), the largest cloud service provider in the United States, will reach 31.04% in the second quarter, higher than the 28.4% in the previous quarter. Microsoft's cloud business is expected to grow by 39.98% during the same period, which is basically the same as the approximately 40% growth rate in the first quarter of this year. Competition will further intensify. Meta is negotiating with Anthropic to lease AI computing power services, further increasing the number of competitors in this market. The industry currently also includes AI cloud service providers such as CoreWeave. Lale Akoner, global market strategist at eToro, said: "As the supply of computing power increases and model costs continue to decrease, cloud computing capacity will become increasingly homogeneous. This may force cloud service providers to invest more funds while accepting a lower return on investment."
Analysts predict that the revenue growth rate of Amazon Cloud Technology (AWS), the largest cloud service provider in the United States, will reach 31.04% in the second quarter, higher than the 28.4% in the previous quarter. Microsoft's cloud business is expected to grow by 39.98% during the same period, which is basically the same as the approximately 40% growth rate in the first quarter of this year. Competition will further intensify. Meta is negotiating with Anthropic to lease AI computing power services, further increasing the number of competitors in this market. The industry currently also includes AI cloud service providers such as CoreWeave. Lale Akoner, global market strategist at eToro, said: "As the supply of computing power increases and model costs continue to decrease, cloud computing capacity will become increasingly homogeneous. This may force cloud service providers to invest more funds while accepting a lower return on investment."