Investors favour Alphabet as big tech ramps up capital outlays for AI

• The complexity and opacity of circular investments among major players have heightened this wariness.
• Amazon will provide more clues about AI investment trends when it reports third-quarter results on Thursday.

Three of the largest US technology firms announced plans to sharply increase capital spending next year, but only Alphabet, Google’s parent company, saw its shares surge as investors weighed the costs and sustainability of competing in artificial intelligence.

Alphabet, Microsoft, and Meta each revealed higher annual capital expenditure targets, prioritising new investments in chips and data centres to power their AI ambitions.

While all three reported robust revenue growth, markets responded unevenly: Alphabet stock jumped 7.3 per cent after its upbeat report, while Microsoft and Meta fell 3 per cent and 7 per cent, respectively, in premarket trading.

The key differentiator

Alphabet has the ability to fund its aggressive investments with strong cash flow. In the third quarter, Alphabet spent $23.95 billion on capital expenditures—a sum equal to 49 per cent of its operating cash flow. By contrast, Meta and Microsoft spent 64.6 per cent and 77.5 per cent of their cash flow, respectively, raising red flags for investors worried about shrinking free cash flow.

With AI driving a wave of multi-billion-dollar deals—but little detail provided on AI’s direct contribution to revenue and profits—investors are becoming increasingly cautious. The complexity and opacity of circular investments among major players have heightened this wariness.

Nonetheless, tech executives remain resolute. Meta CEO Mark Zuckerberg acknowledged the risk of over-investing but said, “In the worst-case scenario, we’d see some loss and depreciation, but we’d grow into that and use it over time.”

Strong cash flow, analysts say, gives companies like Alphabet a greater ability to withstand lower short-term returns as they build up AI infrastructure.

Looking ahead, attention now turns to Amazon, a key cloud computing competitor, which will provide more clues about AI investment trends when it reports third-quarter results on Thursday.