AI capex boom

Global tech investors are evaluating returns

Four tech giants — Google, Meta, Amazon, and Microsoft — lost an aggregate $900 billion in market value last Thursday after declaring their respective third-quarter (July-September 2026) results. On Friday, big tech shares continued to slide. The biggest loser was Alphabet, Google’s parent, which had its market capitalisation shaved off by $500 billion with a catastrophic 13 per cent drop in one session. Amazon lost 7 per cent and Meta 6 per cent. All of these companies continue to be highly profitable but disappointed the street. The cited rationales for the selloffs are interesting. The bearish sentiment is centred, one way or another, on exposure to artificial intelligence (AI).

 Google’s search business is being cannibalised by its own AI model, Gemini. Search and other revenues grew 12 per cent year-on-year to $63.35 billion, much lower than the 17 per cent growth in Q2 and 19 per cent in Q1. Alphabet’s capital expenditure (capex) in the quarter was $51.4 billion, which was more than double that in the same quarter last year. Google’s free cash flow fell to a negative $9.1 billion from a positive $24.5 billion a year ago. This was only the second quarter of negative cash flow since it went public in 2004. Google also reported a second successive quarter of slowing growth in search revenues, and admitted that its increase in ad revenues had eased because users had moved to using the overviews generated by the Gemini chatbot rather than relying on traditional search with its pages of links. Users who saw an AI summary clicked through for links on only 8 per cent of visits. Google is starting to put more ads in Gemini overviews in order to compensate.

 The other big losers, Amazon and Meta, have seen downgrades because they too have spent more money on AI-related investment than investors are comfortable with. Google, Meta and Amazon all registered negative cash flow because of the sheer scale of their AI-related investment. Microsoft is the only one that has reported positive cash flow. Analysts calculated that the four tech giants’ AI-related capex in Q3 was $207 billion as against $113 billion spent by them during the same period last year. Collective guidance is for AI-related capex to the tune of another $232 billion in Q4 and close to $750 billion in aggregate for the full year. Capex has hit levels where even four highly profitable companies cannot fund it through internal accruals. Alphabet has raised debt and plans to mobilise $85 billion through an equity issue. Meta is looking at an equity funding of $95 billion.

 AI expenditure is paying off. Google Cloud’s revenues more than doubled, up 103 per cent to $30.71 billion. Amazon Web Services saw a 39 per cent rise in Cloud sales to $46 billion. Google also has many inquiries for its tensor processing unit AI chips, which, according to reports, could generate $75 billion in 2027 sales. According to the company, there is more demand for its data centres than it can satisfy. The unrestrained capex has led to concerns about the stresses involved in funding the AI boom. The bearish market response cast doubts on the sustainability of AI investment in a week when Anthropic published its initial public-offering prospectus. For the first time since ChatGPT was launched in November 2022, investors in AI are looking at the cost of capital versus the return on capital employed.