The story of "AI burning money" is no longer effective? Tech giants' free cash flow is under pressure. The era of "rough investment" may have come to an end.

Although it is no longer new for tech giants to participate in the AI arms race, the market was still somewhat “shocked” by the nearly $700 billion in capital expenditure budgets announced by the “Big Seven” U.S. stocks for 2026, as most of them reported earnings this week.

However, unlike the previous “CapEx-driven” model, the giants that significantly increased their capital spending have not seen the expected “returns.” Since the beginning of this week, Google, Microsoft, Amazon, and Meta have respectively fallen by 4.48%, 6.77%, 12.11%, and 7.68%. An institution described it as: “Market sentiment has rapidly shifted from ‘FOMO (Fear of Missing Out)’ to ‘Tail Risk Hedging’ within just a few days.”

Why is the market no longer buying the story of “AI burning money”? On one hand, the market is gradually realizing that years of massive capital expenditure often come at the expense of free cash flow. Last year, the four major U.S. internet companies collectively generated $200 billion in free cash flow, lower than the $237 billion in 2024.

Amazon recently stated that it expects to spend $200 billion this year, but Morgan Stanley analysts forecast that the company’s free cash flow in 2026 will be -$17 billion; Bank of America believes its losses could reach $28 billion. Documents filed with the U.S. Securities and Exchange Commission show that as its business continues to expand, the company may seek to raise funds through equity and debt financing.

The situation with Alphabet, Google’s parent company, is similarly “not much better.” Morgan Stanley predicts its capital expenditure will reach $250 billion in 2027. Meanwhile, Pivotal Research forecasts that Alphabet’s free cash flow will plummet nearly 90% this year, from $73.3 billion in 2025 to $8.2 billion. Mizuho Securities analysts wrote in a report that high capital expenditure will “lead to limited free cash flow in 2026 and uncertain investment returns.”

Additionally, according to estimates from Barclays Bank, Meta and Microsoft’s free cash flow will decrease by 90% and 28%, respectively, this year.

▌The “AI makes stocks rise” logic has become invalid

On the other hand, against the backdrop of pressure on free cash flow among tech giants, the market is increasingly shifting its focus from “burning money” to “making money.”

Deutsche Bank analysts recently wrote in a report on Alphabet that the company’s infrastructure build-out is creating a “meaningful moat.” The reason is that in this epoch-making opportunity of artificial intelligence, its revenue is expected to reach trillions of dollars. Morgan Stanley’s Brian Nowak said that Alphabet “has seen many positive signals regarding returns from Google Cloud, Google Search, and YouTube.”

Michael Nathanson, co-founder of independent research firm MoffettNathanson, summarized: “In fact, we are at the beginning of a new technological revolution, and the sustainability of revenue growth is really hard to predict. We are entering a new era where forecasting revenue growth becomes more difficult. Many unexpected things are happening right now.”

Another typical example is Apple, the only “Big Tech” company whose stock price has risen in the past week, demonstrating strong profitability. In Q4 last year, the company declined 17% to $2.4 billion, with an annual total of about $12 billion, forming a stark contrast with its peers. TechInsights explained that Apple’s minimal capital expenditure is related to its collaboration with Google to gain AI dividends from computing and cutting-edge models. This has turned Apple’s AI capital expenditure into an on-demand payment model.

Under this new focus, the U.S. stock software sector is currently facing intense selling pressure. CITIC Securities believes that the sector’s recovery will mainly depend on improving its own performance, and the highly attractive valuation levels more reflect the current market risk profile rather than serving as a basis or prerequisite for a market rebound. It expects that risk-off sentiment, ongoing high volatility, and short-term performance certainty chasing will remain core trading features.

Guotai Junan International Research Department stated that the proliferation of AI tools is eroding the traditional SaaS moat. Since valuations were already high earlier, tech stocks are showing abnormal vulnerability to any negative news, and investors are beginning to question whether leading tech companies can truly support the profit expectations implied by their high valuations. This has led to continuous outflows of funds from large tech companies that have led the market in recent years, accelerating inflows into more defensive traditional industries.

On the investment front, the institution pointed out that looking ahead, the tech sector will accelerate its differentiation, with defensive assets becoming more attractive. The era of “as long as you touch AI, stocks go up” in the past three years is coming to an end. Companies that can be genuinely empowered and transformed into revenue through AI will be able to cycle through downturns and will be favored by the market.

(Source: Cailian Press)