Investors are uneasy about the infrastructure spending related to AI, while large technology companies continue to increase their investments.
In the past two weeks, Alphabet, Amazon, Meta, and Microsoft have all disclosed plans to invest over $740 billion in capital expenditures this year. Wall Street interprets this as AI infrastructure spending, which includes data centers and chips.
In the early days of the AI craze, investors were generally willing to tolerate such substantial expenditures, as it was seen as a sign that the company was confident in its technological growth potential. However, by the fourth quarter, this enthusiasm seemed to give way to concerns regarding negative free cash flow (i.e., expenditures exceeding the cash generated by the company), rising debt, and doubts about whether these massive investments would ultimately yield sufficient returns.
On Friday, anxiety in the market further spread. The Nasdaq index fell by 2.9%, and chip stocks also suffered heavy losses: NVIDIA dropped by 4%, Broadcom fell by more than 5%, and Qualcomm fell by 11%. Alphabet plummeted by 12% on Thursday, recording its worst single-day performance in history. After its market value evaporated by $500 billion, it continued to decline on Friday.
An important concern is that companies that in the past relied on their core businesses to generate substantial free cash flow are now being impacted by the threat that AI poses to the economic models of these businesses. This week, Alphabet provided the clearest example of this. Google's parent company reported negative free cash flow of $9.1 billion for the third quarter, which is the second consecutive quarter of negative free cash flow; at the same time, quarterly capital expenditures increased to $51.4 billion. Alphabet expects to spend up to $205 billion this year and predicts that these expenditures will continue to increase until 2027.
At the same time, the huge success of AI Mode —– Google's direct integration of the AI chat function into its search –– is eroding the company's money-making machine. Google's search advertising business accounts for about half of its revenue, but its growth has slowed to 12%, the slowest in five quarters. In other words, while Google is making substantial investments in AI technologies that could weaken its search business, it still relies on this same search business to fund its operations.
Amazon is also in a similar situation. The company reported that its free cash flow over the past 12 months was negative $42.4 billion, compared to positive $14.8 billion the previous year. The company stated that capital expenditures this year are expected to reach $220 billion. Despite a 39% increase in revenue from its cloud business AWS, Amazon's stock price still fell by 7% after it announced its financial results on Thursday.
Meta is also consuming cash. The company reported a negative free cash flow of $2.1 billion in the third quarter, with capital expenditure growing faster than operating cash flow. Meta expects capital expenditure this year to reach up to $145 billion. The company noted that its new free personal AI agent Muse is somewhat like a "gold devourer" (CEO Mark Zuckerberg has said it "requires a lot of computing power to operate"). Nevertheless, advertising revenue still increased by 26%. Despite this, last week Meta's stock price still fell by 10%.
In terms of free cash flow, Microsoft is the only exception – it recorded $18.6 billion in positive free cash flow in its most recent quarter, with capital expenditures amounting to $45.2 billion, which is lower than the previously estimated $50 billion. Microsoft stated that this was not an intentional slowdown in AI expenditures, but rather due to delays in the delivery of capacity from third-party suppliers. As a result, the stock prices of small companies that rent out AI computing power also fell accordingly.
It is worth noting that the funds used to pay for these AI infrastructure projects do not come solely from the profits of large technology companies, but also from the issuance of stocks and bonds. According to data from S&P Global Market Intelligence, Microsoft, Alphabet, Amazon, Meta, and Oracle raised a total of $326 billion in debt in 2026, which is three times the amount they financed last year.
The demand for computing power, represented by AI, remains strong. Google, Amazon, and Microsoft have all seen growth in their cloud services. However, investors are beginning to worry about the costs required to meet this demand.
This chaotic situation could bring trouble to the much-anticipated IPO of Anthropic. This AI company submitted its listing application earlier this week, and its future growth depends on its ability to obtain massive computing power. The UK's Financial Times reported on Friday that Blackstone has warned investors that the company may not be able to obtain an investment-grade rating after IPO, which means it may ultimately rely more on ultra-large-scale cloud service providers and third parties to fund its infrastructure expansion plans.
