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Alphabet's strong cash flow supports capital spending

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Investors cautious of AI investments with unclear returns

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Zuckerberg acknowledges risks of over-investing in AI

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Amazon's ( AMZN ) strong AWS growth offsets capex worries

By Deborah Mary Sophia, Akash Sriram and Jaspreet Singh

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

companies flagged plans this week 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 ), Facebook-owner Meta

and Amazon ( AMZN ) all announced plans for higher annual

capital expenditures as they pour money into chips and data

centers.

Shares of all of those companies, with the exception of

Amazon ( AMZN ), have risen substantially this year on expectations that

they will be winners in the AI race. But investors cheered

Alphabet's report while pushing Microsoft ( MSFT ) and Meta stocks lower,

as they calculated the costs to each firm of the investments.

Amazon ( AMZN ) on the other hand soared nearly 13% in extended trading

after its earnings report showed that its cloud unit, AWS,

handily beat estimates with a 20% rise in revenue. Investors

took that as a sign that Amazon's ( AMZN ) hefty investments were paying

off and that AWS was weathering competition from rivals better

than feared, offsetting worries of over-investing in AI.

Shares of Meta sank more than 11% on Thursday while Microsoft ( MSFT )

ended the session 3% lower, as investors remain concerned about

the timeline for returns on their heavy investments.

Alphabet's shares, however, rose as much as 6% before

closing about 3% higher.

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 at brokerage 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%.

Amazon ( AMZN ) stands even higher at about 90%, but after several

quarters of concerns that the company was losing share to

Microsoft Azure and Google Cloud, the AWS boost came as an

adequate relief.

"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."

Amazon ( AMZN ) chief Andy Jassy said on Thursday: "You're going to

see us continue to be very aggressive investing in capacity

because we see the demand."

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.