Benjamin Klein, senior portfolio manager at Baskin Wealth Management, joins BNN Bloomberg to discuss the markets. <\/p>\n
Cash flow is king again.<\/p>\n
Wall Street rewarded Microsoft and Oracle on Wednesday for showing that they could fund their enormous AI ambitions without endlessly tapping investors.<\/p>\n
Alphabet, by contrast, was punished for burning through cash, while Google Search\u2019s slower growth fanned fears that competition was hurting the business that bankrolls its AI expansion.<\/p>\n
Alphabet shares plunged more than 13 per cent on Thursday, putting them on track for their worst day on record, while Microsoft swung between gains and losses after rising over three per cent in premarket trading.<\/p>\n
The divergence shows that after rewarding companies for spending aggressively to secure computing capacity \u2014 often through debt \u2014 investors are demanding more evidence that the resulting growth can finance the next round of outlays.<\/p>\n
Meta offered an early warning last week, when better-than-expected revenue growth and an upbeat outlook were eclipsed by its cash burn.<\/p>\n
Oracle, on the other hand, ended regular trading nearly 11 per cent higher on Wednesday after Larry Ellison\u2019s 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.<\/p>\n
\u201cAlphabet and Microsoft were night and day,\u201d said Melissa Otto, head of research at S&P Global Visible Alpha.<\/p>\n
\u201cMicrosoft\u2019s quarter demonstrated very disciplined growth, whereas Google is burning cash and its core business came in below expectations,\u201d she said, adding that it may lead investors to question \u201cis AI taking some share\u201d from Google Search.<\/p>\n
Alphabet poured 121.4 per cent of its operating cash flow into capital spending in the September quarter, compared with 68 per cent by Microsoft, excluding finance leases.<\/p>\n
A lower ratio leaves more cash for buybacks, dividends or paying down debt. A ratio above 100 per cent means a company is spending more than its operations generate and must make up the gap with reserves or borrowing.<\/p>\n
Google\u2019s search revenue growth also slowed to 12 per cent in the September quarter, falling short of expectations for a 14.7 per cent increase, even as CEO Sundar Pichai said queries were growing at their fastest pace in five years.<\/p>\n
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.<\/p>\n
Cloud boom, cash squeeze<\/p>\n
Alphabet\u2019s eyebrow-raising capital outlay \u2014 with as much as US$205 billion expected this year \u2014 is, however, driving gains at Google\u2019s other major AI business.<\/p>\n
Google Cloud revenue more than doubled to $30.71 billion, but Alphabet\u2019s spending overwhelmed that growth. Cash burn hit $9.07 billion after the company posted its first quarter of negative cash flow in the June period.<\/p>\n
\u201cThis is definitely a different business, Google. It\u2019s a different business today than it was three, five, 10 years ago,\u201d said Jeremy Saltzberg, vice president and senior investment officer at Check Capital, which owns Alphabet shares.<\/p>\n
Saltzberg pushed back on the concerns about spending, saying Alphabet needed to have big outlays to stay competitive at a time when OpenAI and Anthropic appear to be pulling ahead in Silicon Valley\u2019s AI model race.<\/p>\n
\u201cWe think this is a sport of kings, which is that if you don\u2019t have $150 billion to spend next year on capital expenditure, don\u2019t even bother showing up,\u201d Saltzberg said.<\/p>\n
Microsoft\u2019s cash flow advantage <\/p>\n
Microsoft offered a stark contrast. The company generated $18.6 billion in free cash flow in its fiscal first quarter, nearly $10 billion more than Wall Street expected, even as it poured $45.2 billion into expanding its computing infrastructure.<\/p>\n
Revenue at its Azure cloud business surged a better-than-expected 48 per cent and the company forecast faster-than-expected cloud growth for the current quarter, suggesting corporate demand for AI computing remains strong.<\/p>\n
The results also suggested Microsoft was finding a broader market for AI beyond a handful of deep-pocketed customers, including OpenAI, whose heavy computing requirements have fueled the industry\u2019s expansion.<\/p>\n
\u201cThe shiny object stuff is waning\u201d as more businesses move beyond experimenting with the newest or most powerful AI models and commit to long-term contracts, Microsoft CEO Satya Nadella said in a conference call with analysts.<\/p>\n
\u201cI want the breadth,\u201d he said. \u201cWe have large customers who want to buy from us … As long as the pricing is right, we may sell them some. If not, we will be patient about building the breadth business.\u201d<\/p>\n
(Reporting by Aditya Soni and Deborah Sophia in Bengaluru; Editing by Sayantani Ghosh and Thomas Derpinghaus)<\/p>\n
Related Stories<\/p>\n","protected":false},"excerpt":{"rendered":"Benjamin Klein, senior portfolio manager at Baskin Wealth Management, joins BNN Bloomberg to discuss the markets. Cash flow…\n","protected":false},"author":2,"featured_media":950772,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[20],"tags":[62,712,276,277,49,48,61],"class_list":["post-950771","post","type-post","status-publish","format-standard","has-post-thumbnail","category-artificial-intelligence","tag-ai","tag-apple-news","tag-artificial-intelligence","tag-artificialintelligence","tag-ca","tag-canada","tag-technology"],"_links":{"self":[{"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/posts\/950771","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/comments?post=950771"}],"version-history":[{"count":0,"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/posts\/950771\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/media\/950772"}],"wp:attachment":[{"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/media?parent=950771"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/categories?post=950771"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/tags?post=950771"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}