U.S. cloud computing giants are beginning to see early returns on their massive investments in artificial intelligence, but the rising cost of building the necessary infrastructure for this technology is starting to pressure their free cash flows, raising investor concerns.

According to a Reuters analysis based on consensus estimates from LSEG, the total capital expenditures of Microsoft, Alphabet, Amazon, Meta Platforms, and Oracle are expected to exceed the free cash flows these companies generate by 2027.

The data shows that these companies will generate annual operating cash flows in 2027 that are about $340 billion higher than in 2025, while capital spending is expected to rise by about $534 billion, meaning $1.57 in additional investments for every extra dollar of operating cash flow.

As the earnings season kicks off, with Alphabet reporting on Wednesday, investors will be watching whether rapid growth in cloud computing and AI revenue can keep pace with the sharp increase in spending.

A Google sign is displayed at the company's headquarters in New York City (Reuters)

Recent stock movements reflect these concerns. The cloud computing giants have led the market rally since the AI boom began, driven by expectations of future growth, but all except Alphabet have underperformed the S&P 500 over the past year.

"Investors are underestimating the scale of the fundamental shift AI is causing in the business model of big tech," said Shai Polur, chief market strategist at Futurum Equities. "Historically, these companies were valued as asset-light platforms, where revenue grew much faster than capital needs. But AI is pushing them toward a hybrid model where software, advertising, and cloud computing are increasingly dependent on huge spending on physical infrastructure."

The capital expenditure estimates include all investments, not just AI-related spending, as companies do not regularly disclose the size of their AI-specific investments.

Executives have said the bulk of spending on data centers, servers, networking equipment, and cloud infrastructure is driven by growing demand for AI.

Spending forecasts are also subject to change, as analysts' estimates for these companies' capital expenditures this year have risen from about $485 billion in January to about $730 billion in July, according to LSEG data.

A trader works on the floor of the New York Stock Exchange (AFP)

Signs of Starting to See Returns

In contrast, some signs are emerging that AI investments are yielding tangible results.

Microsoft said its AI-related business has surpassed an annualized revenue run rate of $37 billion, while Amazon's cloud computing services unit grew 28% in the first quarter.

Concerns Over Cash Flows

But the main worry for investors is the potential for AI-related revenue generation to slow while massive infrastructure spending continues.

Microsoft reported operating cash flow of $35.8 billion in the second quarter of its fiscal year, against capital spending of $37.5 billion, including finance leases.

"Earnings growth may not be enough to justify investments if capital spending drains liquidity. Companies exist to make profits, not just to spend money," said David Russell, head of global market strategies at TradeStation.

Amazon reported operating cash flow for the trailing twelve months ended in the first quarter rose 30% to $148.5 billion, but its free cash flow fell to just $1.2 billion.

Investors appear most concerned about Oracle, whose shares have fallen 36% since the start of the year after its free cash flow turned negative.

The company's ratio of capital expenditure to operating cash flow has steadily increased, as it plans to raise between $45 billion and $50 billion through debt and equity issuance to fund its cloud infrastructure expansion.

According to LSEG data, Oracle's ratio of capital expenditure to operating cash flow rose from 47% in fiscal 2022 to 174% in fiscal 2026, which ended in May.

The company's capital spending was $55.7 billion in the latest fiscal year, compared with operating cash flow of $32 billion.

Logos of Microsoft and Mistral AI are displayed on screens in an illustrative photo in Paris (AFP)

Returning Money to Shareholders Faces Pressure

Despite high spending levels, Microsoft, Alphabet, and Meta still generate enough free cash flow to fund dividends and share buybacks, according to their SEC filings.

But share buyback programs could face pressure if high spending continues and clear financial returns from AI investments are delayed.

"Over the next two to three years, companies need to prove that AI is generating additional revenue, expanding margins, and improving cash flows," said Freddie Lavrik, senior trader at Winthrop Capital Management.

He added: "If these financial benefits don't start to appear by then, the market will begin to question whether the investment cycle has gone too far."