Meta·Alphabet, third quarter facility spending exceeds operating cash… MS maintains free cash flow surplus
Time lag between sales growth and return on investment... Expanding the use of capital increase, lease, and customer prepayment
The race to invest in artificial intelligence (AI) infrastructure is testing companies' ability to raise funds. As related businesses grow, the money spent on servers and data centers also increases, and there are cases where facility spending exceeds cash earned from operations. The ability to secure the necessary financial resources until increased demand leads to actual cash inflow has emerged as a key variable in investment competition.
Business growth is confirmed in the performance of major cloud companies. Google Cloud sales from July to September this year were approximately $30.7 billion, up 103% from the same period last year, and Microsoft's Azure sales also increased by 48%. However, both businesses include services other than AI. Sales of TPU systems, which Google Cloud began recognizing as sales in the second quarter of this year, also contributed to growth. It is difficult to determine how much the use of AI services has increased based on these sales growth rates alone.
The path that connects investment performance to profits is also different for each company. Cloud operators provide computing resources and services and receive fees from customers. In a meta with a high proportion of advertising, content recommendation and improving advertising efficiency are key tools. Meta believes that although AI is already contributing to increased advertising sales, investments in new AI technologies and services will take longer to yield results than investments in core business. After spending money to expand facilities, there is a gap before the effects are returned with sufficient cash.
This uncertainty was reflected in Meta's credit rating outlook downgrade. On October 30 (local time), international credit rating agency S&P Global Ratings maintained Meta's long-term credit rating at 'AA-' and changed its outlook from 'stable' to 'negative'. There were concerns about large-scale facility investment, the duration of the free operating cash flow deficit, and the time it would take for new service sales to offset the increase in costs.
In fact, Meta generated $32.79 billion in cash from operating activities in the third quarter, but spent $34.91 billion on facility investment, including repayment of principal on finance leases. Free cash flow was negative $2.12 billion. Even though sales increased by 26% compared to the same period last year, the money earned in that quarter alone could not cover facility expenses.
Alphabet also had operating cash flow of about $42.3 billion during the same period, but spent about $51.4 billion on facility investment. Free cash flow, the difference between the two amounts, was a deficit of approximately $9.1 billion. These results also reflect factors other than infrastructure investment.
Alphabet paid $5.2 billion in fines and interest to the European Commission (EC) in July. The company explained that inventory accumulation for TPU system sales was also a factor in lowering operating cash flow. The amount deducted from the total inventory items in the cash flow statement was approximately $3.2 billion. This reflects both payments due to past sanctions and the demand for working capital in the process of growing the business. The burden of funds invested in inventory varies depending on the delivery and payment schedule, so it must be considered separately from fines.
MS had cash left over even after covering facility expenses. Operating cash flow in the first quarter of fiscal 2027, which covers July to September of this year, was $58 billion, exceeding the $39.4 billion in cash paid to acquire tangible assets. The free cash flow presented by the company was a surplus of $18.6 billion. MS cited the increase in cloud billing and payment collection as the reason for the improvement in operating cash flow.
These figures are the performance of the entire company, including existing businesses. There are also differences in the free cash flow formula, such as whether or not to include principal repayment of finance leases, so there are limits to simple comparisons of absolute sizes. The need for external financial resources varies depending on how much cash generated from operations covers facility expenses. However, a quarterly free cash flow deficit does not immediately mean a lack of liquidity. To determine the ability to sustain investment, cash holdings and conditions for additional financing must also be considered.
Methods of raising money for investment are also becoming more diverse. In an analysis released on October 19, JP Morgan diagnosed that initial AI investment was primarily funded by its own cash, but the role of bond and stock issuance has recently expanded. At the same time, he added that the increase in external procurement cannot be seen as a weakening of the main business, given that the operating cash generation power of major companies is still strong.
Meta has confirmed the terms of its public offering of common stock and mandatory convertible preferred stock-linked depository receipts worth a total of $37.5 billion, excluding additional acquisition options. Among these, $12.5 billion worth of depository receipts were issued on October 29th. Since $25 billion of common stock is linked to the forward sale contract, Meta's receipt of funds occurs at the time of contract settlement. There is a difference between the announced procurement size and the cash immediately available.
Oracle proposed a plan to distribute the initial payment burden. At an investor event on October 28, the company announced that it would reduce cash requirements until free cash flow turns into surplus by utilizing supplier finance, hardware provided by customers, and customer prepayments. In addition to raising funds from the capital market, it is a method of coordinating the payment schedule with the entity that provides the equipment.
Long-term rental contracts and guarantees should also be included when considering financial burden. In the AI Infrastructure Report released on August 27, S&P pointed out that the use of debt, leases, and guarantees is increasing, and that joint ventures, special purpose corporations, and residual value guarantees complicate credit analysis. This method spreads the initial outlay, but the payment obligations and risks that will arise under the contract remain.
Considering corporate disclosures and procurement plans, when looking at the growth potential of the AI industry, both the sales growth rate and the speed of investment recovery must be considered. This is because the cash generation capacity of the main business, the income generated from new facilities, repayment of loans, and the payment schedule of long-term contracts are intertwined to determine investment capacity. In addition to the ability to connect demand to sales, the ability to cover the gap between expenditures and income is expected to determine competition among companies.
