Cash-Strapped U.S. Tech Giants Plan $1.6 Trillion 'AI Battle' Next Year

Alphabet, Google's parent company and the first big tech firm to face judgment during the second-quarter (April-June) earnings season, has once again fueled Wall Street's argument that AI investment is excessive. Despite performing well in its existing businesses, its AI investment spending has grown so large that its cash has effectively been depleted.

Even in this situation, Alphabet raised its capital expenditure (CAPEX) plans for this year and next once more, in part due to the recent surge in memory chip prices. To raise funds while short on cash, a company needs to take out additional high-interest loans from banks, issue more corporate bonds, or carry out a rights offering that dilutes its stock. All of these are negative news for a company's share price.

The problem is that Alphabet is not the only big tech firm facing this reality. Among hyperscalers (mega-scale cloud operators) or companies that have entered that business—including Amazon, Microsoft, Meta (Facebook's parent), Oracle, and SpaceX—many have even lower profitability in their existing businesses than Alphabet. Wall Street is skeptical about their ability to secure future profitability, given that the more their AI-related spending swells, the more their corporate credit ratings could fall. The more hyperscalers' capital expenditure plans increase, the greater the likelihood that the semiconductor market led by Samsung Electronics, SK hynix, and Micron will expand further.

Alphabet Raises This Year's AI Capex from $190 Billion to $205 Billion... Overtakes Amazon as Industry's Largest

On the 22nd (local time), Alphabet released its second-quarter earnings after the market close, disclosing that its revenue during the period rose 24% from the same period last year to $119.8 billion (about 177 trillion won). This exceeded the estimate of $116.9 billion compiled by market research firm London Stock Exchange Group (LSEG). In detail, the cloud segment's growth stood out. Google Cloud's revenue surged 82% from the same period last year to $24.8 billion, driven by rising demand for enterprise AI and infrastructure. The search and YouTube advertising segments, which serve as cash cows, posted revenue of $63.2 billion and $11.1 billion, respectively. The other segment, which includes the autonomous ride-hailing service Waymo, posted revenue of $382 million and an operating loss of $1.8 billion.

Earnings per share (EPS) also reached $9.11, more than three times Wall Street's expectation of $2.89. A significant portion of the EPS increase stemmed from the effect of rising values in Alphabet's stakes in certain companies, following the listing of space and aviation firm SpaceX on the 12th of last month and preparations for the initial public offering (IPO) of Anthropic, the developer of the AI model 'Claude.'

Google Cloud's backlog of orders increased from about $460 billion (about 680 trillion won) in the first quarter to $514 billion (about 760 trillion won). Cloud segment revenue included, for the first time, the amount from selling its in-house-developed AI chip, the Tensor Processing Unit (TPU), to external data centers rather than to Google Cloud.

Alphabet CEO Sundar Pichai said, "Our AI investment is redefining the horizons of what's possible across all areas," and noted that 90% of the Fortune 100 companies are adopting the enterprise 'Gemini' model. According to Pichai, the Gemini app's monthly active users (MAU) also grew to 950 million.

In fact, market participants' interest in Alphabet's second-quarter earnings was never in the performance of its existing businesses from the outset. The key factor influencing the share price was whether there was any change in the scale of AI-related capital expenditure.

Alphabet's second-quarter capital expenditure came to $44.9 billion (about 66 trillion won), slightly above the market estimate of $44.1 billion to $44.8 billion. Furthermore, Alphabet CFO Anat Ashkenazi said at the earnings call that the company had raised its capital expenditure forecast for this year from the previous $180 billion to $190 billion to $195 billion to $205 billion (about 288 trillion to 303 trillion won). On next year's capital expenditure, she said it would be "significantly larger due to demand for data center construction and securing computing resources." This meant the company would further increase its spending to build AI technology infrastructure. Wall Street forecasts Alphabet's capital expenditure next year at $250 billion to $330 billion.

Issued So Many Bonds It Even Held Record Rights Offering... Shares Plunge 7% as Cash Turns 'Negative'

As Alphabet raised this year's capital expenditure plan to $205 billion, the company's investment scale overtook Amazon to become the highest among major hyperscalers. Earlier, on February 5, Amazon had presented an AI capital expenditure of $200 billion for this year. Alphabet had presented $175 billion to $185 billion at the start of the year, then raised it to $180 billion to $190 billion, and this time raised it once again to $195 billion to $205 billion, surpassing Amazon. Microsoft, another hyperscaler, revised its plan upward from $185 billion to $190 billion. Meta also raised its capital expenditure forecast for this year from the previous $115 billion to $135 billion to $125 billion to $145 billion. Oracle set its annual investment at around $50 billion.

What shocked investors at this Alphabet earnings release was not only that Alphabet's capital expenditure had risen a notch higher. Alphabet unsettled Wall Street by announcing that its second-quarter free cash flow (FCF) recorded a net outflow of $5.86 billion. Alphabet's free cash flow exceeded $24 billion in the third and fourth quarters of last year alone, but continued AI-related investment reduced it to about $10 billion in the first quarter of this year, and in the second quarter it turned into a net outflow altogether.

Its debt also increased significantly due to the effect of successively issuing bonds to fund AI investment. CFO Ashkenazi noted that debt, which stood at around $16 billion a year ago, has recently approached $100 billion due to a series of corporate bond issuances. She also added that the sharp rise in debt was the background for the rights offering carried out last month.

In fact, Alphabet issued $20 billion (about 30 trillion won) worth of bonds in the U.S. bond market in February this year. Just a few days later, Alphabet also issued bonds denominated in Swiss francs and British pounds. In particular, in the U.K., where it issued 1 billion pounds (about 2 trillion won) worth of bonds, it drew attention by even issuing a 100-year maturity corporate bond. While 100-year bonds have been issued as government bonds during past periods of ultra-low interest rates, they are an extremely rare case in the tech company bond market. Among tech companies, IBM issued a 100-year dollar bond 30 years ago, in 1996. In May, Alphabet also sold 8.5 billion Canadian dollars worth of corporate bonds in Canada. This too was the largest issuance record in the Canadian bond market until Amazon surpassed it last month.

With capital still insufficient despite the massive bond issuances, Alphabet announced on the 1st of last month that it would also carry out an $80 billion (about 120 trillion won) rights offering for AI infrastructure investment. This was the largest rights offering in history, surpassing the $70 billion offering by Brazil's state-owned oil and gas company Petrobras in 2010. By Alphabet's standards, it was also the first rights offering in 21 years since September 2005. As even this was not enough, Alphabet further increased the rights offering to $85 billion (about 130 trillion won) on the 3rd of the same month.

At its second-quarter earnings call, Alphabet explained its decision to increase capital expenditure, saying that "AI demand from enterprises and consumers exceeds the company's supply capacity." The market's reaction was cold. On the 23rd in the New York stock market, Alphabet's shares plunged a full 7.13%, leading the overall decline of the Nasdaq Composite Index (-2.15%). Other hyperscalers followed suit, including Microsoft (-2.24%), Amazon (-4.57%), Meta (-3.36%), and Oracle (-4.61%).