*

Alphabet's strong cash flow supports capital spending

*

Investors cautious of AI investments with unclear returns

*

Zuckerberg acknowledges risks of over-investing in AI

(Updates share movement in paragraph 4)

By Deborah Mary Sophia, Akash Sriram and Jaspreet Singh

Oct 30 (Reuters) - Three of the biggest U.S. technology

companies flagged plans on Wednesday to accelerate capital

spending over the next year but investors were most accepting of

Google-parent Alphabet's ability to fund its plans

from its cash flow.

Alphabet, Microsoft ( MSFT ) and Facebook-owner Meta

all announced plans for higher annual capital

expenditures as they pour money into chips and data centers.

Shares of all three have risen substantially this year

on expectations that they will be winners in the AI race, but

investors only cheered Alphabet's report as they calculated the

costs to each firm of the investments.

Shares of Meta sank more than 11% on Thursday while

Microsoft ( MSFT ) fell more than 2%, as investors remain concerned about

the timeline for returns on such heavy investments.

Alphabet's shares, however, rose over 5%.

A key reason for the gain, analysts say, is the search

giant's ability to balance its soaring expenses with strong cash

flow.

"I would think that comes into play - to have capital

spending be a lower percentage of revenue and cash flow. That

maybe gives investors more comfort. All the players are ramping

up spending pretty dramatically, and there's been a lot of

concern about pressure on free cash flow," said Dave Heger,

senior equity analyst Edward Jones.

Alphabet's capital expenditure of $23.95 billion in the

September quarter was 49% of its cash generated from operations.

The percentage for Meta, however, is 64.6%, with Microsoft ( MSFT ) even

higher at 77.5%.

"Ongoing investments in data centers and AI infrastructure

is a theme we've seen across Big Tech this earnings season. But

unlike some of its peers, Alphabet is more than covering that

spend with cash flow, and it's firing on all cylinders," said

Josh Gilbert, market analyst at eToro.

Investors have become wary of AI spending but big tech

companies are not detailing exactly how much AI contributes to

revenue and profit.

With multi-billion-dollar deals being struck across the AI

industry, investors are also growing cautious of a web of

circular investments.

Still, executives were adamant that they had to spend to

keep up with demand for AI computing power. Meta CEO Mark

Zuckerberg said that in the worst-case scenario of

over-investing in AI, the company would see "some loss and

depreciation, but we'd grow into that and use it over time."

Companies with stronger cash flow can afford to invest more

aggressively in AI infrastructure because they can tolerate

lower returns on those outlays, said Dan Morgan, portfolio

manager at Synovus Trust.

Major cloud computing provider Amazon ( AMZN ) will offer

another piece of the AI investment picture and returns in the

tech space when it reports third-quarter earnings on Thursday.