Microsoft shares have soared 35% since the company's July 29 earnings report showed the fastest cloud growth in four years, marking their best day since 2008. In contrast, Alphabet's stock fell 7% in after-hours trading Wednesday after the company missed profit projections and increased AI spending past $50 billion in the third quarter. As reported by Bloomberg, the resulting cash burn stoked investors' fears that hyperscalers aren't generating enough revenue to justify their debt-fueled infrastructure investments. Traders are looking for protection in case AI spending doesn't pan out, with Alphabet's five-year credit default swaps hitting a record high and up 16% this month, while Microsoft's five-year CDS also reached a record and is up almost 9% in October.
Microsoft's Azure cloud business is expected to show 45% growth in constant-currency terms, with the latest reports confirming that Azure and other cloud-services revenue grew 43% in the prior quarter. For Alphabet, Google Cloud is expected to generate revenue of about $29 billion in the third quarter, up 91% from roughly $15 billion a year ago, with the latest figures showing Google Cloud revenue reached $24.8 billion after growing 82% in the prior quarter. As reported by NDTV Profit, investors will be looking at growth in cloud-computing businesses as a proxy for AI-related demand when judging spending effectiveness.
According to NDTV Profit, Microsoft is projected to have negative free cash flow in its current fiscal year ending June, followed by declines before rising for the foreseeable future. Alphabet is expected to generate negative free cash flow of $3.6 billion this year and $30 billion in 2027 before turning positive in 2028. "The companies that can show they are producing cash for shareholders are more in the driver's seat in this market than companies that aren't," said Luke O'Neill, portfolio manager of the Catalyst Dynamic Alpha Fund. "That's why Microsoft has been doing better than the other hyperscalers over the past few months."
According to NDTV Profit, Anthropic PBC's IPO filing underscored how AI giants are relying on cloud titans, with Anthropic committing to spend at least $114 billion with Google over coming years and roughly $45 billion with Microsoft, regardless of computing capacity usage. Microsoft's capital expenditure is expected to exceed $190 billion in its 2027 fiscal year, up 65% from the roughly $116 billion spent last year, while Alphabet's capex is seen more than doubling to $202 billion in 2026 from $91 billion last year. The latest reports confirm that Meta's quarterly capital expenditures reached $34.91 billion, showing the scale of AI infrastructure outlays across the industry.
Both stocks are underperforming for the year, with Microsoft climbing 8.9% and Alphabet gaining 3.8%, compared with the 13% rise in the S&P 500 Index and 18% advance in the tech-heavy Nasdaq 100 Index. As reported by Bloomberg, Microsoft shares jumped after the company's cloud revenue beat estimates, bolstering confidence in the tech giant's AI play. "Right now the fear gauge is clearly on high alert about all this spending and ROI question," Catalyst's O'Neill said, noting that Microsoft is benefiting from "discipline" in its approach to AI investments. If companies disappoint on cloud growth or fail to demonstrate that spending is paying off, their shares could face pressure similar to Meta Platforms, which tumbled 7% after reporting plans to raise future spending commitments by $125 billion to $825 billion.
