Same AI race: Alphabet burns cash while Microsoft keeps it positive

On October 28, Alphabet's Google parent company Alphabet saw a 10% drop in its shares while Microsoft's shares rose by 4% in extended trading. Despite both tech giants showing increased cloud revenues, the market responded differently to their performance reports. Alphabet missed estimates on both revenue and earnings, leading to negative free cash flow, while Microsoft exceeded expectations in revenue, earnings, and cloud business.

Alphabet reported a Q3 revenue of $127.58 billion, which is a 25% increase. However, analysts had expected it to be $128.22 billion. Adjusted earnings per share reached $2.67, falling short of the forecasted $3.02. The $8.66 billion loss on equity investments was a significant factor in Alphabet's decline. Advertising revenue came in at about $82 billion, about $1.4 billion below expectations. Nevertheless, Google's cloud revenue more than doubled to $30.71 billion, exceeding forecasts of $28.7 billion.

Search advertising grew by 12% to $63.35 billion, falling short of the $64.96 billion forecast. Operating income came in at $40.58 billion, against the expected $43.19 billion. Capital expenditure surged to $51.36 billion, up 114% from the previous year, but still below the $55.09 billion projected by analysts. Free cash flow turned negative at $9.07 billion, a stark contrast to the positive $24.46 billion in the previous year.

Microsoft, on the other hand, beat expectations with a 19% revenue growth to $92.28 billion, surpassing the consensus of $90.69 billion. Adjusted earnings per share rose to $4.89, exceeding the $4.73 forecast. Microsoft's Azure revenue grew by 48% to $33.17 billion, outpacing the $32.32 billion expectation. Total Microsoft Cloud revenue rose 30% to $63.9 billion. Capital expenditure, including finance leases, totaled $45.2 billion, a 30% increase. Analysts had projected a figure of $50.67 billion.

Both companies demonstrate heavy investments in AI and cloud growth. However, Microsoft successfully beat on all fronts while spending less than anticipated. Conversely, Alphabet grew its cloud business faster but missed targets in search, invested more, and burned cash. This discrepancy highlights investors' preference for evidence of sustainable growth, stronger cash generation, and better shareholder returns.

Google's annual revenue now tops $400 billion for the first time, and its market capitalization has reached $2.77 trillion, following a positive court ruling on Chrome. Microsoft expects to spend $80 billion on AI in the current fiscal year.