In their recent earnings reports, Microsoft and Alphabet revealed capital expenditure (capex) figures that fell short of analysts' expectations, with Microsoft reducing its forecast for the year to $170 billion from $175 billion, while Alphabet maintained its guidance at $195 billion to $205 billion.
This development comes amid a backdrop of increasing capital expenditure forecasts from other tech giants, as they compete to build AI infrastructure to meet soaring demand. Following the announcements, shares of neocloud companies such as CoreWeave, Nebius, and IREN, as well as Oracle, experienced declines.
Microsoft CFO Amy Hood indicated that delays from third-party graphics processing unit providers would push some capacity availability to the first half of 2027, which raises concerns about the pace of AI infrastructure development.
Alphabet's finance chief, Anat Ashkenazi, noted that external computing power only became available late in Q3, contributing to a disappointing earnings report that saw Alphabet's shares drop about 10% in after-hours trading. Despite these setbacks, some investors remain optimistic about Alphabet's management approach to AI spending.
The upcoming earnings report from Amazon will provide further insights into hyperscaler capex trends. Meta also reported a capex increase, but its shares fell due to negative free cash flow. The challenges faced by neocloud companies, which require significant capital for expansion but lack investment-grade credit ratings, are compounded by rising interest rates and concerns over debt.
Analysts predict that by 2030, a significant portion of neocloud companies may either be absorbed or cease operations. Nevertheless, Microsoft remains optimistic about future capital spending, anticipating acceleration in the first half of 2027. Overall, hyperscaler capex is projected to exceed $1 trillion next year, with continued growth expected despite the current shortfalls.
Investors reacted positively to Microsoft's earnings beat, driven by a 48% sales growth in its Azure cloud business, prompting analysts to recommend buying Microsoft stock and raising their price target