Cash is king as investors draw new battle lines against AI spending boom

By Aditya Soni and Deborah Mary Sophia

Oct 29 (Reuters) – Cash flow is king again.

Wall Street rewarded Microsoft and Oracle on Wednesday for showing they could finance their enormous AI ambitions without constantly appealing to investors.

Alphabet, on the other hand, has been punished for spending a lot of money, while Google Search’s slower growth has stoked fears that competition will hurt the company funding its AI expansion.

Microsoft shares jumped more than 3% in after-hours trading, while ‌Alphabet plunged nearly 10%, as investors drew a sharper distinction between companies making money from AI and those struggling to contain its costs.

The divergence shows that after rewarding companies for aggressive spending to secure IT capacity – often through debt – investors are demanding more evidence that the resulting growth can finance the next round of spending.

Meta issued an early warning last week, when better-than-expected revenue growth and an optimistic outlook were overshadowed by its cash burn. Oracle, on the other hand, ended regular trading up nearly 11% on Wednesday after Larry Ellison’s company said it plans to cap external financing and hopes to turn cash flow positive in the second half of fiscal 2028.

“Alphabet and Microsoft were night and day,” said Melissa Otto, head of research at ⁠S&P Global Visible Alpha.

“Microsoft’s quarter demonstrated very disciplined growth, while Google burned through cash and its core business fell short of expectations,” she said, adding that this could lead investors to wonder “is AI taking share” in Google Search.

Google’s search revenue rose 12% in the September quarter, but fell short of expectations for a 14.7% increase, even though CEO Sundar Pichai said queries were growing at their fastest rate in five years.

The long-lucrative business is under threat from chatbots and AI agents that are changing the way people search for information, just as the company is investing more in technology. Capital spending will increase significantly in 2027, Chief Financial Officer Anat Ashkenazi told analysts.

CLOUD BOOM, CASH SQUEEZE

Alphabet’s eye-popping capital spending — with up to $205 billion expected this year — is generating gains for Google’s other big AI business, however.

Google Cloud’s revenue more than doubled to $30.71 billion, but Alphabet’s spending outpaced that growth. Cash burn reached $9.07 billion after the company recorded its first quarter of negative cash flow in the June period.

“It’s definitely a different business, Google. It’s a different business today than it was three, five, 10 years ago,” said Jeremy Saltzberg, vice president and chief investment officer at Check Capital, which owns shares of Alphabet.

Saltzberg pushed back on concerns about spending, saying Alphabet needed to make big expenditures to stay competitive at a time when OpenAI and Anthropic appear to be pulling ahead in the race for Silicon Valley’s AI model.

“We think it’s a game of kings, which is, if you don’t have $150 billion to spend next year on capital spending, don’t even bother showing up,” Saltzberg said.

THE MICROSOFT CASH ADVANTAGE

Microsoft offered a stark contrast. The company generated $18.6 billion in free cash flow in its fiscal first quarter, nearly $10 billion more than Wall Street expected, even though it invested $45.2 billion in expanding its IT infrastructure.

Revenue from its Azure cloud business grew a better-than-expected 48% and the company expects faster-than-expected cloud growth in the current quarter, suggesting enterprise demand for AI computing remains strong.

The findings also suggest that Microsoft is discovering a broader market for AI, beyond a handful of deep-pocketed customers, including OpenAI, whose heavy computing demands have fueled the sector’s expansion.

“Shiny objects are in decline” as more companies move beyond experimenting with the latest or most powerful AI models and commit to long-term contracts, Microsoft CEO Satya Nadella said on a conference call with analysts.

“I want width,” he said. “We have big customers who want to buy from us… As long as the prices are right, we can sell to them. Otherwise, we will be patient to expand our business.”

(Reporting by Aditya Soni and Deborah Sophia in Bangalore; Editing by Sayantani Ghosh and Thomas Derpinghaus)