Is Big Tech's AI Investment a Money Pit? Earnings Tell a Different Story [Weekend Money]

Strong Second-Quarter Results for Big Tech Giants Including Google, Amazon, and Microsoft

Robust Growth and Solid Contract Backlogs in the Cloud Sector

Key Issue: Speed of Contract Conversion into Cash Flow

Hardware Cost Surge and Persistent FCF Pressure Remain Concerns

Concerns are mounting over U.S. Big Tech companies, particularly regarding whether they are spending too much on artificial intelligence (AI) data centers. As chip and server prices continue to rise, capital expenditures keep increasing, which puts pressure on free cash flow (FCF). With competition intensifying in the market for lower-cost AI models, questions are growing about whether these investments are truly profitable.

The second quarter results have, for now, provided some answers to these concerns. Although the cost burden has clearly increased, demand was also stronger than expected. Shinhan Securities evaluated the latest Big Tech earnings, stating, "We once again confirmed demand that is strong enough to ease concerns."

What stands out are the contract indicators. Alphabet's Google Cloud backlog reached $514 billion (about KRW 729.2118 trillion), an increase of over $50 billion from the previous quarter. Microsoft's backlog (commercial RPO) also rose to $678 billion, up 84% year-on-year. Amazon's backlog grew over 150% to $496 billion. This means that AI investments are not being made based on vague expectations alone, but are being supported by actual contracts.

Cloud revenue was also strong. AWS grew by 37%, Google Cloud by 82%, and Microsoft Azure by 43%. The overall cloud market expanded by 43% in the second quarter, marking the highest growth rate in eight years. This suggests that AI is driving growth not only in AI-dedicated cloud services, but across the cloud market as a whole.

However, the burden has not completely disappeared. All big tech firms acknowledged ongoing FCF pressure. Increases in hardware prices are likely to gradually reflect in new contract prices and short-term asset costs. Especially for AI servers and chips, shorter lifespans result in faster replacement cycles, which means the investment recovery structure is different from longer-lived assets like data centers.

The speed of capital procurement is also critical. In the first half of this year, hyperscalers and related companies, including Nvidia, issued $225 billion in bonds, up 973.7% year-on-year. Alphabet also undertook major equity financing. The companies have now entered a phase where they cover investment burdens in the order of operating cash flow, debt, and then capital raising.

Nevertheless, there is widespread consensus that the burden remains manageable for now. This is because sales, contracts, and profit margins are all rising together. If only sales were increasing while margins were squeezed, it would indicate that hardware inflation could not be passed on to customers. However, the figures up to the second quarter suggest the opposite. Shim Ji-hyun, senior researcher at Shinhan Securities, stated, "Competition with low-cost models is inevitable, so the key will be the speed at which contract indicators are converted into revenue and cash flow, as well as the rate of hardware price increases." She added, "Financial pressure is increasing, but Big Tech companies are still able to handle this for at least several quarters, and faster-than-expected AI monetization supports this resilience."

Analysis now suggests that the key issue for investors is how quickly contracts are converted into actual sales and cash flow. No matter how large the backlog, if monetization is slow, FCF pressure will only intensify. Conversely, if contract revenue realization is fast and cloud margins are sustained, AI investment serves as a means for expanding market share rather than just a cost factor. Shim further commented, "In the long term, Alphabet is favorable for profitability because it can integrate its own chips, models, cloud, and services. In the short term, as FCF pressure heightens, Microsoft remains more stable due to its higher proportion of recurring profits and a solid balance sheet."

This content was produced with the assistance of AI translation services.