Cash is king as investors draw new battle lines in AI spending boom

Oct 29 (Reuters) - Cash flow is king again.

Wall Street rewarded Microsoft and Oracle on Wednesday for showing that they could fund their enormous AI ambitions without endlessly tapping investors.

Alphabet, by contrast, was punished for burning through cash, while Google Search's slower growth fanned fears ‌that competition was hurting the business that bankrolls its AI expansion.

Microsoft shares rose more than 2% in premarket trading on Thursday, while Alphabet plunged nearly 11%, as ‌investors drew a sharper distinction between companies making money from AI and those struggling to contain its costs.

The divergence shows that after rewarding companies for spending aggressively to secure computing capacity — often through debt — investors are demanding ​more evidence that the resulting growth can finance the next round of outlays.

Meta offered an early warning last week, when better-than-expected revenue growth and an upbeat outlook were eclipsed by its cash burn.

Oracle, on the other hand, ended regular trading nearly 11% higher on Wednesday after Larry Ellison's company said it was planning to put a ceiling on external financing and expected to turn its cash flow positive in the second half of fiscal 2028.

"Alphabet and Microsoft were night and day," said Melissa Otto, head of research at S&P Global Visible Alpha.

"Microsoft's quarter demonstrated very disciplined ‌growth, whereas Google is burning cash and its core business ⁠came in below expectations," she said, adding that it may lead investors to question "is AI taking some share" from Google Search.

Alphabet poured 121.4% of its operating cash flow into capital spending in the September quarter, compared with 68% by Microsoft, excluding finance leases.

A lower ratio leaves more ⁠cash for buybacks, dividends or paying down debt. A ratio above 100% means a company is spending more than its operations generate and must make up the gap with reserves or borrowing.

Google's search revenue growth also slowed to 12% in the September quarter, falling short of expectations for a 14.7% increase, even as CEO Sundar Pichai said queries were growing at their fastest pace in five years.

The ​long-lucrative ​business is under threat from AI chatbots and agents that are changing how people search for information, ​just as the company pours more money into the technology. Capital expenditure ‌will increase significantly in 2027, CFO Anat Ashkenazi told analysts.

Alphabet's eyebrow-raising capital outlay — with as much as $205 billion expected this year — is, however, driving gains at Google's other major AI business.