Big Tech AI spending cuts free cash flow to a decade low

In short: Amazon, Alphabet, Microsoft and Meta are spending so much on AI infrastructure that their leftover cash is expected to fall to its lowest level in about a decade.

What's going on

Wall Street forecasts suggest the combined “free cash flow” of Amazon, Alphabet, Microsoft and Meta will drop to about $4 billion in the third quarter. Free cash flow is the money a company has left after paying day to day bills and big purchases, like buildings and equipment. Analysts say that is down from an average of about $45 billion per quarter since the Covid-19 pandemic.

The main reason is a surge in spending tied to artificial intelligence. These companies are putting money into data centers (large buildings filled with computers, like factories for digital work), chips, networking gear, and power needs. The Financial Times describes it as a record $725 billion spending push across Big Tech.

Several companies are expected to run short on cash at times. Analysts expect Amazon to spend more cash than it brings in this year. Meta is expected to burn cash in the second half and Microsoft in at least one quarter. Alphabet is expected to stay positive for the year, but at its lowest level in more than a decade.

This spending is also changing how companies return money to investors. Alphabet bought back no stock in the first quarter for the first time since its buyback program began in 2015, and it has issued new debt. Meta has also paused buybacks and issued debt, and has cut staff to free up resources.

What to watch

Analysts expect cash generation to improve next year if AI spending turns into higher revenue. Another issue to watch is how some projects are financed through separate holding companies, which can make it harder to see who takes the risk if demand for data centers falls.

Source: Financial Times