Big Tech's AI Spending Raises Investor Concerns

Original author: Zhang Yaqi

Source: Wall Street Journal

The AI arms race among tech giants is being put to the test of investors' patience. This week, Microsoft, Meta, and Amazon released their quarterly earnings reports, with the focus shifting from revenue growth to a more fundamental question: When will the steadily rising capital expenditures finally deliver returns?

The context for this test is Alphabet’s recent real-life lesson last week: the company reported its highest quarterly profit in history, at $112.1 billion, but its stock price subsequently dropped more than 7%—as investors grew cautious about the company’s $15 billion increase in its 2026 capital expenditure forecast.

Alphabet, Microsoft, Meta, and Amazon are expected to collectively spend $700 billion on capital expenditures this year, with Wall Street forecasting this figure could exceed $1 trillion by 2027.

Fragile market sentiment has set the stage for this week’s earnings season for three companies. According to UBS Global Wealth Management, as cited by Bloomberg, "Limited visibility on capital expenditures after 2027, combined with rising investor demands for spending discipline, may continue to suppress risk appetite." Meanwhile, Moody’s, a subsidiary of Fitch Ratings, warned last week that sustained capital expenditure plans could "threaten credit quality," with the total direct debt of six major tech companies amounting to approximately $460 billion.

Among the three companies, Microsoft may face the most clearly defined expectations. Analysts expect Microsoft’s capital expenditures this quarter to increase by 74% year-over-year. Meanwhile, the market has high expectations for growth in Azure cloud services.

According to a Morgan Stanley research report, the bank’s analysts are confident that Microsoft’s Azure achieved approximately 41% constant currency growth in the fourth fiscal quarter, exceeding the upper end of management’s guidance of 39% to 40% by about one percentage point. Morgan Stanley’s confidence is supported by positive feedback from channel partners, continued improvements in GPU supply capacity, and the bank’s own survey of chief information officers (CIOs)—72% of CIOs surveyed expect to increase their investment in Microsoft solutions over the next year in cloud migration scenarios, with Microsoft leading all vendors in anticipated share of incremental IT budgets.

The commercial progress of Copilot is also closely watched. In the third fiscal quarter, paid seats for Microsoft M365 Copilot increased from 15 million to 20 million, with management guiding for continued sequential growth in net paid seats. Morgan Stanley noted that Copilot’s monetization path is evolving into three parallel growth pillars: direct seat sales, migration of users to higher-value E7 subscription tiers, and consumption-based AI service pricing. Notably, Microsoft’s price increase for commercial M365 took effect on July 1, 2026, for new customers, and Morgan Stanley expects this pricing adjustment to contribute approximately $2 billion, $4 billion, and $6 billion in incremental revenue during FY27, FY28, and FY29, respectively.

Regarding capital expenditures, Morgan Stanley believes street estimates remain conservative and have room for further upward revisions. Management previously disclosed an expected 2026 calendar year capital expenditure of approximately $190 billion, with about $25 billion attributable to rising component costs. The firm maintains an Overweight rating on Microsoft with a $600 price target, viewing the current ~16x FY28 expected P/E ratio as "too cheap" and not fully reflecting the company’s sustained high-growth potential.

The situation with Meta is more complex. According to Bloomberg, citing Bloomberg Intelligence (BI) analysis, Meta may "significantly" raise its capital expenditure guidance to address pressure from rising component costs—the very factor that triggered last week’s decline in Alphabet’s stock price.

Meanwhile, user growth faces new pressures from regulatory developments. As regulatory bodies around the world advance legislation to restrict teenagers' use of social media, Meta’s user growth prospects will come under greater pressure. The "family daily active users" metric, which measures daily active users across its four core products, is expected to record its weakest growth rate since 2021.

Compared to Microsoft and Meta, market expectations for Amazon’s latest earnings report are more optimistic. According to Bloomberg, citing Truist’s analysis, Amazon’s overall revenue growth could reach 17%, the highest in five years; AWS revenue growth is expected to exceed 30%, marking the highest level since 2022. Strong demand for AI-related services is seen as the primary driver of AWS growth.

However, Amazon also faces scrutiny regarding its capital expenditures. Following Alphabet’s increase in its spending forecast, which triggered a stock price decline, investors remain highly alert to whether the three companies will further raise their capital expenditure guidance for 2027 and beyond.

Moody's released a research report last week that set a grim tone for this week's earnings season. The agency noted that Alphabet, Microsoft, Amazon, Meta, Oracle, and CoreWeave are transitioning from asset-light software, intellectual property, and cloud service models to capital-intensive models requiring "unprecedented levels of investment," a trend that could pressure the credit metrics of these companies.

Kevin McNeil, Vice President at Moody's, said on the agency's podcast: "These companies are large enterprises with solid market positions and balance sheets that are often perfect, but they are initiating capital expenditures on an almost unprecedented scale. Increased capital intensity could lead to negative free cash flow or at least a significant contraction for some companies." He further noted that debt financing "could elevate leverage and add additional risk to balance sheets."

Among the six companies under scrutiny, Oracle is in the most vulnerable position. Moody's has revised its credit rating outlook to negative, with its Baa2 rating just two notches above junk status. Last month, another rating agency, S&P Global, also downgraded Oracle to just one notch above investment grade. In contrast, Alphabet, Amazon, Meta, and Microsoft currently maintain strong balance sheets and are not at risk of losing their investment-grade ratings in the near term.

Amid ongoing capital expenditure expansion, there is clear divergence within the market. Bullish investors argue that demand is real, and supply—not demand—is the constraint on growth. For example, Morgan Stanley noted that Microsoft CFO Amy Hood explicitly stated during last quarter’s earnings call that Azure’s guidance is essentially “allocated capacity guidance,” with growth constrained by data center construction timelines and GPU deployment schedules, not customer demand. As Microsoft plans to double its total data center capacity over the next two years, this constraint is expected to gradually ease.

Bearish investors focus on the lack of visibility into returns. UBS Global Wealth Management notes that "limited capital expenditure visibility beyond 2027" is a key factor suppressing investor risk appetite. Moody’s warning is more direct: the shift from asset-light to asset-heavy models is eroding the high free cash flow advantages these companies have historically prided themselves on.

For long-term investors, UBS still recommends holding positions: "For long-term investors with diversified portfolios, maintaining investments remains the most effective strategy to navigate current uncertainty. Attractive stock opportunities exist across sectors and regions, given strong earnings growth and an improving cyclical backdrop." However, under the lesson of Alphabet, the market has made its verdict clear: strong performance alone is not enough—you must also manage your finances wisely.