Alphabet just stepped up the AI spending race. Why that could be an overhang for the hyperscaler stocks
Alphabet announced an $80 billion equity offering on Monday to fund its artificial intelligence buildout, and Wall Street is nervous that it could start a trend. After swelling over the past few years, analysts expect free cash flows at the hyperscalers to head downwards. As demand for artificial intelligence increases and spending plans keep getting bigger, investors are getting ready for more capital raises and downward pressure on stocks. “We cannot rule out further capital raises from other hyperscalers looking to build out AI infrastructure [and] compute capabilities against what appears to be a backdrop of strong investor demand,” Paul Rossington, tech analyst at HSBC, wrote to clients on Tuesday. Alphabet stock was down more than 2% in Tuesday trading. Microsoft was down more than 3%, Amazon was off 1%, and Meta Platforms was up less than 1%. The $80 billion equity offering from Alphabet amounts to a 2% stock dilution, which Wells Fargo analysts described as “very modest.” However, it could be enough to make investors redo their return-on-investment calculations – potentially for the sector as a whole. “The event likely compels investors to re-underwrite the capacity ROI thesis at Google and perhaps more broadly across the hyperscalers,” Ken Gawrelski at Wells Fargo wrote on Monday. “CapEx expectations [will] likely move higher.” Free cash flow in freefall Cash flows for the AI infrastructure builders are down across the board for 2026 – some by a lot. Analysts predict Amazon’s free cash flow could drop into negative territory this year by nearly $12 billion, according to FactSet data . Alphabet’s free cash flow is expected to fall to about $20 billion from $73 billion in 2025, and Meta’s is forecast to sink to just $18 million from $46 billion, per FactSet data. “It wasn’t long ago that the main push back we got from investors regarding AI spending was – ‘where is all the money coming from?'” Chris Caso, analyst at Wolfe Research, wrote on Tuesday. “Investors had been concerned that hyperscaler cash flow wouldn’t be sufficient to support substantial capex growth in [calendar years] 2027 and 2028. We think the Google announcement is important since it answers that question.” Capex is going up Analysts think AI capital spending could top $1 trillion in 2027. But that could be a prelude to far larger numbers by the end of the decade, if some tech executives are right. Nvidia brass said on their earnings call last month they expect total annual expenditures to be in the $3 trillion to $4 trillion range by 2030. “AI infrastructure spending is on track to reach $3 [trillion] to $4 trillion annually by the end of this decade,” Nvidia chief financial officer Colette Kress said. Analysts at UBS said they regard “potential for higher CapEx 2027 [and] beyond” as a “negative” in the context of Alphabet’s Monday capital raise. “The push to raise capital suggests higher capex than our and consensus estimates for 2027, and free cash flow burn,” Barton Crockett at Rosenblatt wrote in a Tuesday analysis. Equity versus debt Corporate bonds have been the hyperscalers’ main source of financing for the AI buildout so far, so the switch to equity has some analysts scratching their heads. UBS analyst Stephen Ju listed the “equity versus debt cost of capital” as a “negative” in his Tuesday research note. Hyperscalers have also used off-balance sheet deals to finance their infrastructure moves, often with the help of private credit firms, and Google’s equity issuance could suggest this method of financing is going out of fashion. The Bank of International Settlements has labeled off-balance sheet moves as a kind of “shadow borrowing” and says they could create “new shock transmission channels” through the banking system. —Justin Zacks contributed reporting
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