The Zhitong Finance App learned that since the last financial report, the stock price trends of Microsoft (MSFT.US) and Alphabet (GOOGL.US) have diverged, and Wall Street is increasingly concerned about the drag of huge AI expenses on corporate profits. The two tech giants will announce their results after the US stock market on Wednesday. Recent market transactions show that investors prefer Microsoft: Microsoft's stock price has soared 36% since the July 29 earnings report showed that the cloud business had the fastest growth rate in four years and triggered the best single-day performance since 2008; while Alphabet's stock price fell 6.3% since the July 22 earnings report caused negative free cash flow due to a sharp increase in AI capital expenditure.
The market expects Google's parent company's free cash flow to be negative in 2026 and 2027, while Microsoft's free cash flow is expected to decline in the current fiscal year (ending June) and then pick up in the foreseeable future. Luke O'Neill, portfolio manager at Catalyst Dynamic Alpha Fund, said, “Companies that can prove that they are generating cash for shareholders have an advantage over the current market over those that can't,” “which is why Microsoft has performed better than other hyperscale cloud vendors over the past few months. It shows the ability to better manage this spending and return environment.”
Traders are looking for hedging protection in case huge AI expenses don't pay off. Alphabet's five-year credit default swap (CDS) price hit a record, rising 16% this month. Microsoft's five-year CDS also set a record. It rose nearly 9% in October, and is expected to rise for the fifth month in a row, the longest continuous rise since records began.
Both stocks have outperformed the market this year: Microsoft rose 9.9%, Alphabet rose 2.4%, the S&P 500 index rose 13%, and the Nasdaq 100 index, which is dominated by technology stocks, rose 17%.
Investors will look at the growth of their cloud computing business when judging the spending of the two companies, which is generally seen as a proxy indicator of AI-related demand.
“It will be very reassuring to see cloud growth accelerate further, as it will increase investors' confidence in their AI investments,” said Ted Parrish, chief investment officer at Parrish Capital. He holds Microsoft shares and is considering increasing his position.
Earlier this week, Anthropic PBC's IPO documents highlighted the AI giant's deepening dependency on the cloud giant. Anthropic promised to spend at least $114 billion on Google and $45 billion on Microsoft over the next few years, regardless of whether or not it uses its computing power capacity. It also promised to spend $110 billion on Amazon by 2036, which will release earnings on Thursday.
According to consistent market expectations, Microsoft's Azure cloud business is expected to grow by 45% at a fixed exchange rate. TD Cowen analyst Derrick Wood wrote in an October 14 report that Azure has the potential to “exceed expectations and higher than normal levels” this quarter because third-party data “screened the strongest results in history.”
On the Alphabet side, Google Cloud's third-quarter revenue is expected to be around US$29 billion, up 91% from about US$15 billion in the same period last year, and further accelerated from the 81% growth rate in the second quarter.
“The monetization part is becoming more clear,” said Dan Sheehan, portfolio management director at Telos Wealth Advisors. “We're starting to see incremental returns, although this hasn't lessened the pressure on their balance sheets.”
If the two companies disappoint in terms of cloud growth, or fail to prove that spending is paying off, their shares could suffer as much as Meta Platforms' earnings report last week. Despite many encouraging trends, Meta's plan to increase future spending commitments by $125 billion to $825 billion overshadowed these highlights, causing the stock price to plummet 7% the next day.
“Currently, fear indicators are clearly on high alert for all of these spending and ROI issues,” said Catalyst's O'Neill. Microsoft “benefits from its focus on this discipline.”
Analysts expect Microsoft's capital expenditure in the 2027 fiscal year to exceed 190 billion US dollars, an increase of 65% over last year's approximately 116 billion US dollars. Its free cash flow for fiscal year 2027 is expected to be less than $32 billion, down from $67 billion last year, before rising to $47 billion in fiscal year 2028 and $87 billion in fiscal year 2029.
According to consistent estimates, Alphabet's capital expenditure in 2026 is expected to more than double last year's US$91 billion to US$2020 billion. As a result, the company expects to generate negative $3.6 billion in free cash flow this year, minus $30 billion in 2027, and positive in 2028. Its free cash flow in 2025 was positive $73 billion.
“I'm not worried about Alphabet's negative free cash flow,” Sheehan said. Given the continued growth of these mega-tech companies, he sees them as a safe haven in the market. “If it wants to, it can stop spending somewhere and suddenly the cash flow comes back.”