Big Tech companies are grappling with an investor revolt over their substantial AI expenditures, despite often reporting strong revenue growth. Alphabet's shares plunged over 7% after it raised capital expenditures for 2026 to as much as $205 billion and reported negative free cash flow for the first time since its 2004 IPO. Similarly, Microsoft and Meta Platforms have seen their shares drop by 21% and 9.8% respectively, due to concerns that their significant AI investments may not yield returns quickly enough, illustrating that current good reports are not sufficient to justify elevated valuations.
Analysts are noting a significant shift in investor sentiment; while previously high capital expenditure was seen as a positive, it is now viewed with skepticism, leading to sell-offs. According to Bloomberg, Alphabet, Microsoft, Amazon, and Meta are projected to spend about $724 billion this year and nearly $950 billion in 2027 on capital expenditures. This increased spending is altering business models and introducing new risks, such as Alphabet's cash flow turning negative, which surprised investors.
Morgan Stanley estimates indicate that Microsoft, Oracle, Meta Platforms, and Alphabet could collectively incur over $680 billion in depreciation charges over the next four years, with Oracle's 2025 depreciation potentially escalating from $4 billion to $56 billion by 2029. This highlights concerns about the long-term profitability of these AI investments, as the value of their spending is written off. However, the exact impact depends on revenue opportunities and the durability of GPUs, both of which are uncertain in the early stages of AI investment.
The market is increasingly splitting, with semiconductor companies benefiting from the AI infrastructure build-out, while software and services companies face pressure. This indicates investors prefer parts of the AI supply chain with clearer near-term sales. Some Magnificent Seven stocks, like Microsoft and Meta, appear relatively inexpensive, trading at significant discounts to their historical average profit multiples. However, analysts caution that current valuations may not account for potential future disruptions or an eventual "AI winter" that could lead to margin and valuation compression.
In contrast, Apple has avoided large AI outlays by partnering with model developers, a strategy that has been rewarded by investors, with its shares rising 15% in July and contributing significantly to the S&P 500's performance. This highlights the divergent investor reactions to different AI strategies within Big Tech, where intense scrutiny on capital expenditures is now the norm for companies heavily investing in AI infrastructure.
