Big Tech AI Spending Drives Free Cash Flow to Decade Low

The combined free cash flow of Amazon, Alphabet, Microsoft and Meta is expected to fall to roughly $4bn in the third quarter. That compares with an average of $45bn per quarter since the Covid-19 pandemic six years ago. Full-year free cash flow for the four companies, known as hyperscalers, is set to hit the lowest level since 2014.

At that time their combined revenues were about one-seventh of current levels. Free cash flow is watched as the cash remaining after operating costs and capital spending that can service debt or return value to shareholders. The companies have shifted from relatively asset-light cash generators to some of the world's largest investors in physical infrastructure.

This represents the deepest industry-wide capital expenditure cycle they have experienced. After funding early AI investments largely from income, the companies now face trade-offs such as cutting jobs, reducing shareholder returns or borrowing.

Amazon is expected to spend more cash than it generates this year. Meta will burn cash in the second half of the year, as will Microsoft in at least one quarter. Alphabet's full-year free cash flow is projected to remain positive but fall to its lowest level in more than a decade.

The companies began the capital expenditure increase with strong balance sheets. Analysts project cash generation will improve next year as the AI spending generates additional revenue. One company bought back no stock in the first quarter for the first time since its share repurchase programme began in 2015.

During that quarter the company issued $31bn in new debt and on Tuesday issued another $17bn in euro and Canadian dollar bonds. Another company has issued $55bn of debt over the past six months while pausing share buybacks. The pause is the longest since it began repurchasing its own stock in 2017.