Amazon and Intel Tank the AI Trade. The One Factor Linking Big Tech’s Underwhelming Earnings.

Amazon reported a third consecutive quarter of negative free cash flow. (PATRICK T. FALLON/AFP via Getty Images)

Key Points

Technology stocks fell as investors scrutinized shrinking cash flows caused by heavy spending on artificial intelligence.
Amazon reported negative free cash flow of $42.4 billion for the 12 months ending in September, down from positive $14.8 billion a year earlier.
Intel shares plummeted 25% after the company warned it does not expect positive free cash flow in 2027.

Big Tech earnings are on track to be more of a horror movie than a crowd pleaser. Technology stocks across the market are sinking as investors eye shrinking cash flows across the sector’s largest companies.

Amazon .com was the latest victim. The online retailer-and-cloud computing provider disclosed that its free cash flow was negative $42.4 billion for the 12 months to the end of September. That’s a huge reversal from the $14.8 billion in cash it generated in the same period a year earlier.

It’s a familiar pattern. Google-parent Alphabet and Meta Platforms both reported outflows of cash for the third quarter. Of the biggest companies reporting, only Microsoft offered a positive cash story, generating $18.6 billion for the quarter—although that was still down from $25.7 billion in the prior year.

There’s no mystery about what’s responsible for this particular massacre of previously healthy cash-flow balances—spending on artificial intelligence. But previously those concerns had largely been offset by the hugely profitable core businesses of the big companies investing in AI. As Barron’s has noted, those are now suffering their own missteps, which means investors are putting big cash outlays under harsher scrutiny.

That accounts for stock drops of the major AI spenders—Amazon was down 6.9% in premarket trading Friday, with Alphabet, Meta and Microsoft all edging down as well. But the selloff was also hurting chip stocks and cloud-computing companies, which should arguably be the beneficiaries of their spending.

Neocloud company CoreWeave —which has acted as a proxy for the riskiness of the AI trade due to its debt load—was down more than 6% as was its peer Nebius Group. Investors might be questioning how much more borrowing the market can bear, after Microsoft issued $25 billion in debt on Thursday.

As it turns out, AI hardware providers aren’t immune to cost pressures either. Intel stock was plummeting 25% in the premarket after its own earnings report Thursday. The soaring cost of memory chips is crimping its PC market, while the company is also struggling to ramp up supply to meet AI server demand. Intel also warned that it doesn’t expect positive free cash flow in 2027, characterizing it as an “investment year.”

Intel’s warning spooked its peers. Dell Technologies was down nearly 10%, while HP was down close to 8% in the premarket.

“Investors took a moment to examine whether the recent pace of tech valuations still made sense, given all of the spending on AI development that is hitting cash flows,” said Paul Stanley, managing director at wealth management firm Arca. “This is not the first tech and AI correction, and it won’t be the last. We are still in the very early stages of AI development, and pullbacks are par for the course.”

Write to Adam Clark at adam.clark@barrons.com

参与讨论