Updated Version 2 - Review Draft - Amid the AI spending boom, investors redraw battle lines, cash is king

The 4th paragraph has updated share price information

Aditya Soni/Deborah Mary Sophia

Reuters, October 29 - Cash flow is king once again.

On Wednesday, Wall Street responded positively to Microsoft (link) and Oracle, as both companies demonstrated their ability to fund vast AI ambitions without endlessly tapping investors for money.

In contrast, Alphabet was punished by the market for burning through cash too quickly (link), and concerns deepened as the growth of Google’s search business slowed: competition appears to be hurting this core unit that funds its AI expansion.

On Thursday, Alphabet shares plunged more than 13%, heading for what could be their worst day ever; meanwhile, Microsoft shares, after jumping more than 3% in premarket trading, oscillated between gains and losses.

The marked contrast in the market's reaction to the companies’ earnings on Wednesday shows that after previously rewarding tech firms for pouring money—aided by debt—into computing capacity, investors are now demanding more evidence that the resulting growth can pay for the next wave of spending.

Meta gave an early warning last week (link), when growth that beat expectations and an upbeat outlook (link) were overshadowed by its cash burn.

On the other hand, Oracle’s ORCL.N shares closed up nearly 11% in regular trading Wednesday after the Larry Ellison-led company said it would cap its external financing (link) and expected to achieve positive cash flow in the second half of fiscal year 2028.

“Alphabet and Microsoft’s performances were poles apart,” said Melissa Otto, head of Visible Alpha research at S&P Global.

“Microsoft delivered highly disciplined growth this quarter, whereas Google was burning cash and its core business fell short of expectations,” she said, adding this might cause investors to question “whether AI is taking some market share away from Google Search.”

In the September quarter, Alphabet put 121.4% of its operating cash flow into capital expenditures, while Microsoft (excluding finance leases) had a ratio of 68%.

The lower the ratio, the more cash remains for buybacks, dividends, or debt repayment. If it exceeds 100%, the company is spending more than its operating cash flow and must tap reserves or borrow to fill the gap.

In the September quarter, Google’s search revenue grew by just 12%, below the expected 14.7% increase, even as CEO Sundar Pichai said query volume was growing at its fastest pace in five years.

As the company increases investment in this technology, this previously profitable business faces threats from AI chatbots and smart assistants that are changing the way people search for information. CFO Ruth Porat told analysts that capital expenditures will rise significantly in 2027.

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Cloud business booms, but cash tightens

However, Alphabet’s jaw-dropping capital expenditures—projected to reach as high as $205 billion this year—are fueling growth in Google’s other major AI businesses.

Google’s cloud revenue doubled to $30.71 billion, but Alphabet’s spending far exceeded that growth. In the June quarter, after reporting its first-ever negative cash flow in a first quarter, the company burned $9.07 billion in cash.

“Google today is truly a different company. It’s nothing like what it was three, five or even 10 years ago,” said Jeremy Saltzberg, vice president and senior investment officer at Check Capital, which holds Alphabet shares.

Responding to concerns about spending, Saltzberg pushed back, saying that with OpenAI and Anthropic apparently leading Silicon Valley’s AI model race, Alphabet must invest on a large scale to remain competitive.

“We view this as a ‘battle of kings.’ That is, if you don’t have $150 billion for capital spending next year, don’t bother showing up,” said Saltzberg.

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Microsoft’s cash flow advantage

Microsoft paints a sharp contrast. Even after investing $45.2 billion to expand its computing infrastructure, it generated $18.6 billion in free cash flow in the first fiscal quarter, nearly $10 billion above Wall Street expectations.

Its Azure cloud revenue surged 48%, beating market expectations, and the company forecast cloud growth this quarter outpacing estimates—a sign that enterprise appetite for AI computing remains robust.

The results also indicate Microsoft is addressing a broader market for AI—not just the deep-pocketed clients like OpenAI that have largely driven the surge in demand for computing power.

“The hype cycle for those ‘shiny objects’ is fading,” Microsoft CEO Satya Nadella told analysts, as more enterprises move beyond simply experimenting with the newest or most powerful AI models and begin signing long-term contracts.

“What I want is breadth of business,” he said. “We tend to have big customers wanting to buy…We might sell them some if the pricing’s right. If not, we’ll be patient in building out this broader business.”

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