Alphabet and Microsoft Earnings Will Put Investors’ AI Stress to the Test

Alphabet and Microsoft represent a combined 11.5% of the S&P 500 index, and they’re both slated to report earnings after the bell on Wednesday. Analysts expect robust 25.2% and 16.7% revenue growth, respectively, but it will take more than a top and bottom-line triumph to impress.

If last week is any indication, the latest AI bubble anxiety means, even as demand appears as strong as ever, markets want a clear signal that the massive infrastructure buildout is going to yield some good old-fashioned profit and cash flow. 

Tough to Impress

The lagging indicators are practically peachy. Key AI infrastructure providers Micron, ASML and Taiwan Semiconductor Manufacturing in recent weeks each reported robust earnings, suggesting there was vigorous demand to support the AI build-out in the last few months. But the tech selloff that deepened last week is less concerned with the past than it is with the capex journey ahead.

Simply, investors would like a roadmap to profitability on the other side of the AI infrastructure spend. Even a crudely drawn set of directions on a napkin might do. But Gartner analysts forecast it’s a ways off: While AI providers will spend an estimated $6 trillion on infrastructure from 2027 to 2030, they project that during this time AI revenue “will be insufficient to support profitable returns on all planned AI capital expenditures.” This concern is weighing especially hard on neocloud providers, the pure play renters of computing power. The largely unprofitable sector is using billions in debt to finance lightning growth, but is therefore exposed to any slowdown and to the rising cost of borrowing. Last week, neocloud leader Coreweave’s five-year credit default swaps implied a more than 50-50 chance of default in the next half decade and, in fact, Gartner predicts 80% of neocloud providers could cease independent operations by 2030.

Hyperscalers don’t face the same existential threat because of their enormous, diversified revenue. But the pressure to translate hundreds of billions of AI capex into profit is universal. Look no further than Meta: The social media giant reported a revenue beat and offered stronger-than-expected fourth quarter guidance last week only for shares to slump 7% Thursday and another 1% on Friday. AI spending turned its free cash flow negative and the spread on its five-year credit default swaps hit a new record. In other words, markets signaled that AI capex is a risk that comes with a price. Alphabet and Microsoft will face an equally tough jury; here’s what they’ll be looking at:

• Alphabet has already switched from a debt-free approach to tapping debt markets and reported negative free cash flow of $5.9 billion in the second quarter. Cloud revenue and margins will therefore be closely watched — bullish Yorkville Ives analysts, noting Alphabet’s Google Cloud revenue surged 82% year over year to a record $24.8 billion in the second quarter, said the company’s backlog exceeds capacity and justifies capex.
• Microsoft’s Azure cloud computing platform posted 43% year-over-year revenue growth to $37.8 billion in the previous quarter; Yorkville Ives expect it will come in at the high end of management’s ambitious 44% to 45% growth guidance on Wednesday. And investors will want to see more from AI assistant Microsoft 365 Copilot, which surpassed 30 million paid users last quarter, up 50% from the previous quarter.

Room to Grow: Yorkville Ives estimates hyperscalers, poised to spend more than $800 billion on AI in 2026, have a $2 trillion cloud backlog that’s outgrowing sales, giving them ample room to lift spending because they are short on capacity, not on customers.