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

Cash flow is king again.

Wall Street rewarded Microsoft (MSFT-Q) and Oracle (ORCL-N) on Wednesday for showing that they ​could fund their enormous AI ambitions without endlessly tapping investors.

Alphabet (GOOGL-Q), ‌by contrast, was punished for burning through cash, while Google Search’s slower growth fanned fears that competition was hurting the business that bankrolls its AI expansion.

Microsoft shares jumped more than 3 per cent in after-hours trading, while Alphabet plunged nearly 10 per cent, 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 spending aggressively to secure computing capacity — often through debt — investors are demanding more evidence that the resulting growth can finance the next round of outlays.

Meta offered an early warning last week, when better-than-expected revenue growth and an upbeat outlook were eclipsed by its cash ​burn. Oracle, on the other hand, ended regular trading nearly 11 per cent higher on ‌Wednesday after Larry Ellison’s company said it was planning to put a ceiling on external financing and expected to turn its 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, whereas Google is burning cash and its core business came in below expectations,” she said, adding that it ‌may lead investors ​to question “is AI taking some share” ‌from Google Search.

Google’s search revenue grew 12 per cent in the September quarter but fell short of expectations for a 14.7-per-cent increase, even ​as CEO Sundar Pichai said queries were growing at their fastest pace ⁠in five years.

The long-lucrative business is under threat from AI chatbots and agents that are changing how people ⁠search for information, just as the company pours more money into the technology. Capital expenditure will increase significantly in 2027, CFO Anat Ashkenazi told analysts.

Alphabet’s eyebrow-raising capital outlay — with as much as US$205-billion expected this year — is, however, driving gains at Google’s other major AI business.

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

“This is 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 senior investment officer at Check Capital, which owns Alphabet shares.

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

“We think this is a sport of kings, which is that if you don’t have US$150-billion to spend next year on capital expenditure, don’t even bother showing up,” Saltzberg said.

Microsoft offered a stark contrast. The company generated US$18.6-billion in free cash flow ​in its fiscal first quarter, nearly US$10-billion more than Wall Street expected, even as it poured US$45.2-billion into expanding its computing infrastructure.

Revenue ⁠at its Azure cloud business surged a better-than-expected 48 per cent and the company forecast faster-than-expected cloud growth for the current quarter, suggesting corporate demand for AI computing remains strong.

The ‌results also suggested Microsoft was finding a broader market for AI beyond a handful of deep-pocketed customers, including OpenAI, whose heavy computing requirements ​have fueled the industry’s expansion.

“The shiny object stuff is waning” as more businesses move beyond experimenting with the newest or most powerful AI models and commit to long-term contracts, Microsoft CEO Satya Nadella said in a conference call with analysts.

“I want the breadth,” he said. “We have large customers who want to buy from us ... As long as ​the pricing is right, we may sell them some. If not, we will be patient about building the breadth business.”