Cash is king as investors draw new battle lines in AI spending boom

In the AI spending boom, investors are drawing new battle lines as they shift focus from reward for aggressive spending to evidence of future growth financing. After rewarding companies for AI spending often funded by debt, investors now seek proof that growth can sustain further investments (AFP pic). Microsoft and Oracle were rewarded on Wednesday for funding their AI ambitions without constantly relying on investor support, while Alphabet was penalized for excessive cash burn, and Google Search faced scrutiny as its slower growth raised concerns about competition impacting its core business.

Microsoft's shares surged over 3% in after-hours trading, while Alphabet plummeted nearly 10%, highlighting a clear distinction between companies generating profit from AI and those struggling to manage costs. Alphabet's decline followed its cash burn despite better-than-expected revenue growth and an optimistic outlook. In contrast, Oracle ended regular trading nearly 11% higher after announcing plans to cap external financing and expect positive cash flow in the second half of fiscal 2028.

Melissa Otto, head of research at S&P Global Visible Alpha, noted that Microsoft's disciplined growth contrasted sharply with Google's cash-consuming operations, potentially prompting investors to question if AI is siphoning share from Google Search. Although Google's search revenue grew 12% in the September quarter, it fell short of expectations for a 14.7% increase, as CEO Sundar Pichai reported queries were expanding at their fastest pace in five years.

Alphabet's aggressive capital expenditure, potentially reaching US$205 billion this year, is driving growth in Google Cloud, which more than doubled to US$30.71 billion, though the company's spending is outweighing that progress. Cash burn reached US$9.07 billion, marking Alphabet's first quarterly negative cash flow in June. Despite concerns over spending, experts argue that significant outlays are necessary for Alphabet to remain competitive in the AI race, especially as OpenAI and Anthropic gain ground.

Microsoft demonstrated a cash flow advantage, generating US$18.6 billion in free cash flow in its fiscal first quarter, surpassing Wall Street's expectations by nearly US$10 billion. Azure cloud revenue surged 48% beyond expectations, and Microsoft forecast faster-than-anticipated cloud growth for the current quarter, indicating strong corporate demand for AI computing.

Microsoft CEO Satya Nadella emphasized the need for a broader AI market, as businesses move from experimentation to long-term contracts, underlining the importance of pricing flexibility for sustained growth.