Big Tech's AI flex gets mixed reviews
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If you're making big bets on AI, you better have the revenue and cash flows to back it up.
The big picture: Starkly different market reactions to quarterly results from Microsoft and Google parent Alphabet illustrate the attributes that investors appear to be valuing at the moment.
The latest: Microsoft shares surged after hours Wednesday as sales and earnings per share for the quarter that ended Sept. 30 both beat analyst expectations.
- Quarterly free cash flow — a key measure of the company's ability to continue pouring money into AI investments without consuming all its own cash — declined about 27% from the prior year to $18.63 billion.
- But that was better than the $7.99 billion expected by analysts, according to FactSet.
- Most importantly, it's still very much in positive territory, unlike other hyperscalers.
Alphabet, however, reported quarterly revenue that fell slightly short of expectations, as did its earnings per share.
- What's more, its free cash flow was even worse than expected at negative $9.1 billion. (Wall Street analysts expected negative $2.23 billion in free cash flow, according to FactSet.)
- Its shares tumbled 11% after hours.
The bottom line: The markets don't seem to mind big AI bets if revenues come through and if capital expenditure doesn't consume all the company's operational cash flow.
- But the results from Alphabet — once one of the greatest cash-producing entities in history — suggest that it is getting increasingly difficult to do.
