Tech giants need legacy businesses to keep growing as they pour trillions into the AI buildout

A picture shows logos of the Big Tech companies named GAFAM, for Google, Apple, Facebook, Amazon and Microsoft, on June 2, 2023.

Sebastien Bozon | AFP | Getty Images

The tech megacaps are collectively placing a multitrillion-dollar bet that their infrastructure spending will result in many years of profitable growth. But that's all in the future.

For now, they're reliant on their legacy businesses — whether it's online advertising, business software or e-commerce — to fund their artificial intelligence ambitions.

Earnings this quarter revealed new levels of strain on those core businesses and offered an early test of whether these companies can sustain extended bouts of spending. Meta joined Alphabet and Amazon in reporting negative free cash flow, leaving Microsoft as the lone hyperscaler to remain positive in that realm.

Meta posted negative free cash flow of $2.12 billion, while Amazon's outflows swelled to $42.4 billion and Alphabet's reached $9.07 billion. Microsoft's cash generation declined dramatically for a second straight quarter, this time dropping 27% to $18.63 billion, and the company said it will now turn to the bond market as it continues to ramp up AI infrastructure spending.

Hyperscaler earnings over the past two weeks have coincided with intensifying concerns about the overall health and stability of the broader AI sector. Rising interest rates are making it costlier for companies to raise debt, putting pressure on cash-burning neoclouds that have become critical to the global buildout.

While the tech giants have a cushion not afforded to the neoclouds and other players, investors eventually need the historic rates of spending to convert into massive new revenue streams. Nerves are hitting the stocks this week, with Alphabet suffering its steepest drop ever on Thursday and Amazon sliding in extended trading after its report.

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'Borrowing from the for-now'

Alphabet's report concerned investors the most.

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