Google Midlothian Data Center in Texas, November 14, 2025.
Ron Jenkins Getty Images
alphabet, microsoft, Meta and Amazon In total, companies are expected to spend nearly $700 billion on AI enhancements this year.
For investors who love cash above all else, there may be some red flags flashing.
As the tech-centric earnings season ends this week, Wall Street has a clearer picture of how the artificial intelligence race will accelerate in 2026. Capital spending is now expected to increase by more than 60% from historic levels to reach 2025, as the four hyperscalers load up on expensive chips, build huge new facilities and buy the networking technology to connect everything.
Achieving such numbers will require sacrifices in the form of free cash flow. Last year, the four largest U.S. internet companies generated a total of $200 billion in free cash flow, down from $237 billion in 2024.
Companies are making large upfront investments and promising future returns on their investments, so it looks like we’re in for an even more dramatic drop. This means there will be pressure on margins, reduced cash generation in the short term, and the need to tap more into equity and debt markets. Alphabet sold $25 billion in bonds in November, and its long-term debt will quadruple to $46.5 billion in 2025.
Amazon said Thursday it expects to spend $200 billion this year, but analysts at Morgan Stanley say it expects free cash flow to be nearly $17 billion negative in 2026, while analysts at Bank of America predict a deficit of $28 billion. In a filing with the SEC on Friday, Amazon informed investors that it may seek to raise equity and debt as it continues to expand.
Despite higher sales in the quarter, Amazon’s stock price fell nearly 6% on Friday, bringing its annual decline to 9%. Microsoft is down 17%, the biggest decliner in the group, while Alphabet and Meta are up slightly.
Amazon has launched the most aggressive spending plan among megacaps, but Alphabet isn’t far behind. The company is investing in its cloud infrastructure business and Gemini model, and expects up to $185 billion in capital spending this year. Morgan Stanley Managing Director Brian Nowak told CNBC’s “Power Lunch” that he expects Alphabet to spend up to $250 billion in 2027, with even more spending to come in the coming years.
Pivotal Research predicts that Alphabet’s free cash flow will plummet by almost 90%, from $73.3 billion in 2025 to $8.2 billion this year. Mizuho analysts wrote in a note that bearish investors could view the potential doubling of capital spending this year as “limited FCF in 2026 with uncertain return on investment.”
Still, analysts remained bullish, with all maintaining buy recommendations on their respective stocks. Also with them is Jake Dollarhide, CEO of Longbow Asset Management. He counts Amazon as his largest holding in his portfolio, followed by Alphabet in fourth place and Microsoft in ninth place.
“If you’re putting this much money into AI, your free cash flow is going to go down,” Dollarhide said. “Do we have to go to the bond market or short-term financing to find the best mix of equity and debt? Yes, that’s why CEOs and CFOs are paid the same as they are paid.”
“It was a little shocking.”
Analysts at Barclays expect Meta’s free cash flow to fall by almost 90% after social media company Meta announced last week that capital spending would reach $135 billion this year. Although we expect cash flow to be even tighter over the next two years, we maintained our overweight rating.
“We are currently modeling negative FCF in 2027 and 2028, which is somewhat shocking for us but ultimately likely for all companies participating in the AI infrastructure arms race,” the analysts wrote in a post-earnings note.
“Our top priority is to invest our resources to establish our position as a leader in the AI space,” Meta’s Chief Financial Officer Susan Lee said during an earnings call when asked about capital allocation and future stock buyback plans.
At Microsoft, capital spending is increasing but at a slower pace than other tech companies, while Barclays expects free cash flow to fall 28% this year and rebound by 2027.
Representatives for Alphabet, Amazon, Microsoft and Meta declined to comment.
The big advantage that the tech industry’s most valuable companies have over fast-growing AI startups like OpenAI and Anthropic is that they’ve amassed huge amounts of cash in recent years. As of the end of the most recent quarter, the four leaders collectively held more than $420 billion in cash and equivalents.
Analysts at Deutsche Bank wrote in a note on Alphabet on Thursday that the company’s infrastructure development is creating a “meaningful moat.” This is a sentiment widely shared by industry executives and experts who see AI as a generational opportunity with revenues reaching trillions of dollars.
Companies today are testing and building new AI agents to handle all kinds of tasks, including developing applications with just a few text prompts. All of these advances require massive amounts of computing, which cloud providers say creates insatiable demand for their technology.
“Everything that’s happening between businesses and enterprises is built on top of AI companies like Google, Meta and Amazon,” Futurum Group CEO Daniel Newman said in an interview with CNBC. “These are core technologies.”
Morgan Stanley’s Nowak said Alphabet is “seeing a lot of feedback around our return to Google Cloud, Google Search, and YouTube.” Amazon CEO Andy Jassy also said on an earnings call that Amazon Web Services’ growth was “the fastest in 13 quarters.”
However, many unknowns remain, and some skeptics are concerned that OpenAI’s failure to announce more than $1.4 trillion in AI trades could lead to market contagion, as much of the AI industry’s growth prospects depend on the creators of ChatGPT.
“The truth is, we’re at the beginning of a new technology revolution, and it’s very difficult to know the sustainability of sales,” Michael Nathanson, co-founder of equity research firm MoffettNathanson, told CNBC. “We’re in a new era, and the top line is much harder to predict. There are a lot of surprising things happening.”
—CNBC’s Deirdre Bosa, Jordan Novet, Annie Palmer and Jonathan Vanian contributed to this report.
WATCH: Megacap tech stocks sell off as AI spending outstrips revenue growth
