Hyperscalers face high capex scrutiny after Alphabet’s report is filed

Alphabets it has long been a favorite scale of Wall Street because of its ability to turn capital expenditures into revenues.

But investors expressed dismay at the company’s plans, announced Wednesday along with second-quarter earnings, to improve its capex forecast for 2026, as the Internet giant rushes to open new artificial intelligence data centers.

Shares of Google’s parent fell 7% on Thursday, too Amazon, Meta again Microsoft all down again, underscoring the increased scrutiny of infrastructure investment leading to a shrinking pool of money with uncertain returns. Three megacaps are scheduled to report quarterly results this week.

In recent quarters, investors have cheered the rise in spending, interpreting it as evidence of healthy demand and the backlog of growing money. Alphabet has been well-received on Wall Street – the stock is up nearly 70% over the past year – because its cloud infrastructure business has been growing faster than competitors and Gemini’s models and services have gained traction in a market dominated by OpenAI and Anthropic.

But if last week’s report is a guide, Google is no longer getting the benefit of the doubt. And Mark Mahaney, head of Internet research at Evercore ISI, wrote in a paper Wednesday that Alphabet’s capex boost “increases the likelihood of similar behavior” from Amazon and Microsoft.

Microsoft and Meta will be next to test investor appetite, when they report after the close on Wednesday. Amazon follows on Thursday.

In April, Microsoft predicted $190 billion in capex and annual financing, including $25 billion in premiums, as AI chip demand eats up memory supply.

“If they raise capex again, based on what we’ve seen from Google’s response [last week]it will likely lead to selling pressure in the stock,” Cowen analyst Derrick Wood told CNBC in an interview.

After Alphabet’s report, Amazon’s consensus rose nearly $2 billion to $207.4 billion, according to Visible Alpha.

Amazon in February targeted $200 billion in capex for 2026, the highest in the group until Alphabet raised the high end of its forecast to $205 billion. The company maintained that forecast in April, when CEO Andy Jassy told investors at the time that “its plan remains the same.”

Several analysts wrote in research notes earlier this month that they expect Amazon to raise its capex guidance for the year, as the company ramps up investments in AI, custom chips and other expensive bets like its satellite Internet service, and given higher memory prices.

Jake Dollarhide, CEO of Longbow Asset Management, which owns Amazon, wrote in an email that the online retailer could excite investors “in this environment of growing AI fatigue, sudden questions of meteoric capex budget increases and Silicon Valley and Mag 7 taking on significant levels of debt to finance the construction of a large data center.”

Amazon’s long-term debt rose 81% to $119 billion from December 31 to March 31. Alphabet rose 111% to $98 billion during the first six months of 2026, while the company, long viewed as a money printing machine, turned negative cash flow in the second quarter for the first time.

Wedbush analysts wrote in a note Thursday that Alphabet’s report suggested that capacity remains stuck in high demand, and that there is a “willingness to spend.” But they don’t view the potential capex from Amazon as entirely negative.

“We consider the transaction to be appropriate given the re-acceleration of AWS and the benefits of Amazon’s growing platform across Bedrock, Alexa and its transport network,” wrote the analysts, who recommend buying Amazon stock.

While Google’s cloud is growing rapidly, Amazon Web Services still leads the cloud infrastructure market, with Microsoft a close second. Google Cloud was 30% the size of AWS in 2020 and will be around 50% in the first quarter of 2026. Its cloud business recorded an 82% increase in the second quarter, the fastest growth since at least 2020, after a 63% increase in the previous period.

AWS revenue rose 28% in the first quarter, and analysts polled by FactSet expected about 32% in the second quarter. Revenue from Microsoft’s Azure and other cloud services grew 40% in the first quarter, with FactSet’s second-quarter consensus at 39%.

Mahaney wrote that cloud “demand appears to be endless,” but noted that “it’s hard to see anyone matching” Google’s cloud growth rate during the quarter.

Meta, one hyperscaler with no established cloud business, is expected to record capex this year of $138.9 billion and told investors in April that the figure could reach $145 billion. The company is now looking to sell computing power to third parties.

At the moment, Meta is still issuing money. Analysts polled by FactSet expect Microsoft’s free cash flow to be negative in the fourth quarter for the first time since at least 2001.

Amazon’s free cash flow shifted into the red in the first quarter, and analysts polled by FactSet forecast it would remain there for the rest of the year. The company maintained negative free cash flow in 2021 and 2022 as it doubled its inventory due to a pandemic-induced increase in e-commerce demand.

“I think patience is needed in these names because I think these are going to be AI winners in the medium to long term,” said Tiffany Wade, fund manager at Columbia Threadneedle, who held positions in Alphabet, Amazon and Microsoft at the end of June.

On Alphabet’s earnings call, CEO Sundar Pichai argued that his company’s strategy of calling on outside vendors for more computing power to meet cloud demand would yield attractive margins over the years, despite the costs.

“I think that’s probably the thing to do,” Wade said. “You don’t want to turn customers away because you don’t have the power.”

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