[News] Alphabet Revenue Jumps 25% but Free Cash Flow Deficit Widens to US$9.1B; Microsoft Bucks Cash Flow Pressure

Big Tech’s accelerating AI infrastructure investments are raising concerns about mounting pressure on cash flow. According to The Motley Fool, Alphabet and Microsoft reported strong cloud growth in their latest earnings, but surging capital expenditures are weighing on their free cash flow. Alphabet reported a 25% year-over-year increase in third-quarter revenue to US$127.6 billion, while operating income rose 30%. However, net income declined to US$26.2 billion despite the strong revenue growth, according to its latest earnings release.

Alphabet’s capital expenditures (capex) more than doubled to US$51.4 billion from US$24.0 billion a year earlier, exceeding its operating cash flow of US$42.3 billion. As a result, free cash flow (FCF) remained negative for a second consecutive quarter, with the deficit widening to US$9.1 billion from US$5.9 billion in the previous quarter.

Looking ahead, Alphabet expects capital expenditures to increase significantly in 2027 from its projected US$195 billion to US$205 billion in 2026, CFO Anat Ashkenazi said during an earnings call, as reported by Reuters. Although executives did not provide a specific spending forecast for next year, the prospect of a sharp increase has raised investor concerns.

At the same time, Google Cloud’s expanding TPU business is creating new revenue opportunities while adding to cash flow pressure. Google Cloud revenue more than doubled to US$30.71 billion in the third quarter, with TPU sales becoming a meaningful contributor, according to Reuters. However, Alphabet CFO Anat Ashkenazi said that expanding TPU inventory would further weigh on free cash flow.

Microsoft Remains Free-Cash-Flow Positive Despite Heavy AI Investments

Microsoft, meanwhile, reported a 19% year-over-year increase in revenue to US$92.3 billion for its fiscal first quarter, while operating income rose 21% to US$45.9 billion and net income climbed 32% to US$36.6 billion, according to its latest earnings release.

Unlike Alphabet, Microsoft remained free-cash-flow positive, although its FCF declined 27% year over year to US$18.63 billion after US$39.37 billion in cash capital expenditures. Its total capex, including finance leases, reached US$45.2 billion, The Motley Fool adds.

Reuters notes that Microsoft’s free cash flow significantly exceeded analysts’ US$8.54 billion estimate, while capex fell short of the company’s US$50 billion projection, partly due to delays in third-party computing capacity deliveries.

During the earnings call, CFO Amy Hood said roughly 75% of Microsoft’s capex went toward short-lived assets, primarily CPUs and GPUs, including higher memory and storage costs, with the remainder allocated to long-lived assets, according to a transcript published by Stock Analysis.

Meanwhile, Microsoft’s cloud business continued to benefit from strong AI demand, with Azure revenue rising 48% year over year. Microsoft expects Azure revenue growth to accelerate to 49%–50% in constant currency in the following quarter, Reuters reports.

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