The trajectory of spending is rising sharply, approximately 75% year-on-year. Compared to about three quarters ago, when capex estimates were around $650 billion, the current figures reflect an increase nearing 10%, showcasing the rapid scaling of AI infrastructure across the industry.
Microsoft has been one of the primary players influencing these upward revisions. Its annual capital expenditure has surged from around $150 billion three quarters ago to roughly $190 billion today, marking a rise of about $45 billion. Microsoft CFO Amy Hood mentioned that about $25 billion of this increase is attributed to escalating memory and component costs. However, she highlighted strong underlying demand as a significant factor driving the growth.
Google has stood out in the most recent earnings cycle, with its share price climbing nearly 7% in after-hours trades. Google Cloud has crossed the $20 billion revenue threshold for the first time, achieving 63% year-on-year growth. The company’s order backlog is also doubling, indicating continued strength in demand.
Alphabet CEO Sundar Pichai remarked that cloud revenue could have been even higher if the business weren’t currently limited by compute capacity. He also suggested that capital expenditure in 2027 is anticipated to be considerably higher, emphasizing the company’s aggressive investment strategy in AI infrastructure.
In terms of growth, Google Cloud is outpacing its main competitors. Although Amazon Web Services still leads in absolute revenue, Google Cloud’s growth rate of 63% is about double that of AWS and more robust than Microsoft Azure, positioning it as the fastest-growing major cloud provider.
Nevertheless, the scale of investments is starting to impact cash generation. Firms that historically generated solid operating cash flows are now allocating a significant portion towards capital expenditure, leading to a noticeable decline in free cash flow across the sector.
Alphabet has experienced a sharp decline, Meta Platforms is down around 10%, and Microsoft’s free cash flow has fallen by about 22%. Amazon’s figures appear even more severe due to variations in reporting methods, as it utilizes trailing twelve-month data instead of quarterly snapshots, but the overarching trend remains consistent across Big Tech.
Despite this, management teams are optimistic about investment returns. AWS chief Andy Jassy stated that the company has already secured customer commitments for a substantial portion of its investments and anticipates “compelling” operating margins and returns over time.
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Meta CEO Mark Zuckerberg indicated that the company lacks a fixed roadmap for scaling all AI products. Nevertheless, he stressed that Meta has a clear strategic focus and is confident that its Superintelligence Lab will transform into one of the leading AI research centres in the world.
In summary, while capital expenditure continues to rise each quarter, the industry faces critical questions about how these investments will yield long-term returns and be sustainably financed.
