- Microsoft and Alphabet report after the bell Wednesday with their stocks on very different paths. Microsoft has soared 36% since its July 29 report showed the fastest cloud growth in four years, while Alphabet has lost 5% since its July 22 results showed free cash flow turned negative because of AI capital spending.
- The cash math explains the split. Alphabet’s capex is seen more than doubling to $202 billion in 2026 from $91 billion, leaving negative free cash flow of $3.6 billion this year and $30 billion in 2027, while Microsoft’s fiscal 2027 capex is seen above $190 billion, with free cash flow falling below $32 billion before rebounding to $47 billion in fiscal 2028.
- Credit markets are flashing caution too. Alphabet’s five-year credit default swaps hit a record on Friday and are up 16% this month, and Microsoft’s are up almost 9% in October, on track for a fifth straight monthly increase, which would be their longest streak on record.
- Options traders expect Alphabet to move more. Market makers are pricing a 5.8% move for Alphabet after the report, more than double its two-year average reaction of 2.7%, versus an implied swing of under 5% for Microsoft, Cboe LiveVol data show.
What Happened?
Both companies report third-quarter results after the close, with cloud growth seen as the key proxy for AI demand. Bloomberg consensus expects Microsoft’s Azure to grow 45% in constant currency, and TD Cowen’s Derrick Wood said third-party data for Azure “screened strongest in history.” Google Cloud is expected to generate about $29 billion of revenue, up 91% from roughly $15 billion a year earlier. Microsoft is less than 1% below its closing record, while Alphabet is about 20% below its May closing high, near technical bear-market territory, according to CNBC.
Why It Matters?
The market has moved from rewarding AI spending to rewarding AI spending that still produces cash. “The companies that can show they are producing cash for shareholders are more in the driver’s seat in this market than companies that aren’t,” said Catalyst’s Luke O’Neill. Meta’s experience last week is the warning: it lifted future spending commitments by $125 billion to $825 billion and the stock fell 7% the next day. Both stocks are lagging the market this year, with Microsoft up 9.7% and Alphabet up 3.8%, compared with 13% for the S&P 500 and 18% for the Nasdaq 100.
What’s Next?
Investors will focus on cloud growth, capex guidance and any change to free cash flow outlooks, along with backlog tied to Anthropic, which has committed to spend at least $114 billion with Google and roughly $45 billion with Microsoft. In Alphabet options, one trader appeared to buy about $18.5 million of January 360-strike calls, a sign some investors are positioned for a rebound. Amazon reports on Thursday, extending the test of whether AI cloud revenue is growing fast enough to justify the spending.
