U.S. cloud computing giants have begun to see initial returns from their massive investments in artificial intelligence, but the rising cost of building the necessary infrastructure for this technology is starting to squeeze their free cash flows, worrying investors.

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

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

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

Google logo displayed at the company's headquarters in New York City (Reuters)

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

Shai Bolur, chief market strategist at Futurum Equities, said: 'Investors underestimate the magnitude of the fundamental shift AI is causing in the business model of big tech companies. These companies were historically valued as asset-light platforms, where revenues grew much faster than capital needs, but AI is pushing them toward a hybrid model where software, advertising, and cloud computing increasingly depend on massive spending on physical infrastructure.'

Capital expenditure estimates include all investments, not just AI-related spending, as companies do not regularly disclose the amount allocated to this technology.

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

Spending forecasts are also subject to change, as analysts' estimates for capital spending by these companies 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 initial returns

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

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

Concerns over cash flows

But the main concern among investors is the potential slowdown in AI-related revenue generation while massive infrastructure spending continues.

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

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

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

Investors appear more 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 spending to operating cash flow has risen steadily, as it plans to raise $45-50 billion through debt and equity issuance to fund its cloud infrastructure expansion.

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

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

Logos of Microsoft and Mistral AI appear on screens in an illustrative image in Paris (AFP)

Returning money to shareholders faces pressure

Despite high spending levels, Microsoft, Alphabet, and Meta still generate sufficient free cash flow to fund dividends and share buybacks, according to their U.S. Securities and Exchange Commission filings.

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

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

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.'