As competition in artificial intelligence (AI) investment intensifies, the cash-generating power of hyperscalers—operators of massive data centers—is weakening rapidly. Following Google's first quarterly free cash flow (FCF) turning negative since its listing, Amazon and Meta are also expected to see their cash reserves shrink significantly. Analysts say the financial burden on Big Tech is emerging as a new investment variable, as the funds poured into data centers and graphics processing units (GPUs) grow faster than the cash earned from AI businesses.
On the 22nd, Alphabet (Google's parent company) reported free cash flow of negative $5.855 billion for the second quarter of this year. This marks the first time Google's quarterly free cash flow has turned negative since its Nasdaq listing in 2004.
This reflects the impact of the enormous funds poured into expanding AI infrastructure. Alphabet spent $44.9 billion on capital expenditure (CAPEX) this quarter. On top of this, it raised its capital investment outlook for next year to between $195 billion and $205 billion, higher than the previous forecast of $180 billion to $190 billion. The Financial Times (FT) assessed that "the cash outflow and the additional $15 billion investment plan could further heighten investor anxiety over the scale of AI investment."
This phenomenon is not unique to Google. Other hyperscalers that have entered the AI infrastructure race are also expected to see their cash-generating power slow one after another.
According to the Bloomberg consensus, Amazon, which reports earnings on the 30th, is expected to post negative free cash flow of about $700 million this quarter. Following negative free cash flow of $18.2 billion in the first quarter, this would mark two consecutive quarters in negative territory.
Meta is also expected to record negative free cash flow of about $1.2 billion in this quarter's results. If so, its quarterly cash-generating power would turn negative for the first time in more than a decade. This is a sharp change compared with the $13.2 billion in free cash flow it recorded in the previous quarter. Microsoft (MS), by contrast, is expected to maintain free cash flow of about $15.8 billion this quarter.
Analysts say this change reflects a new phase in the AI investment race. Until recently, the market took the expansion of AI investment itself as a signal of growth, but it has now begun to focus more on return on investment and the pace of cash recovery rather than the scale of investment. Concerns have also been raised that the longer companies sustain massive investment, the greater the burden of external funding, such as corporate bond issuance. Dec Mullarkey, managing director at asset manager SLC Management, said, "The market wants hyperscalers to invest aggressively to secure AI leadership, but it does not want that pace to reach a level that damages corporate profitability."
As funds are prioritized for AI investment, the capacity for shareholder returns may also decline. Silicon Valley tech companies have long propped up the U.S. stock market by expanding share buybacks and dividends on the back of their enormous cash reserves, but priorities for their funds are changing as competition in AI investment gets underway in earnest. Indeed, Alphabet did not buy back a single share in the second quarter, following the same pattern in the first quarter this year.
However, some point out that it is premature to interpret the decline in free cash flow immediately as financial deterioration. This is because the operating cash flow of hyperscalers, including Google, still remains solid. In fact, analysts say the deterioration in Google's free cash flow is not because the cash-generating power of its core business has weakened, but is directly caused by AI expansion.
Some in the market forecast that the true results of AI investment will only be determined in 2027 to 2028. Currently, cash is flowing out due to large-scale investment, but once depreciation costs are reflected in the income statement in earnest, the profitability of AI investment will be laid bare in earnings. Anat Ashkenazi, Alphabet's chief financial officer (CFO), said, "Free cash flow will be under pressure for the time being due to technology infrastructure investment, but we expect that through these investments we can seize opportunities in the AI market and generate attractive returns over the long term."
