Alphabet’s shares fell more than 10% in premarket trading Thursday after the company reported weaker-than-expected earnings and negative free cash flow for the third quarter. Meanwhile, Microsoft’s stock rose nearly 4% as investors praised its disciplined AI investments and strong cash flow performance.
Microsoft’s third-quarter earnings showed $45.2 billion in capital expenditures, a 30% increase from the prior year but below analyst expectations of $50.67 billion. Despite this, the company maintained positive free cash flow of $18.63 billion, down 27% year-over-year. Alphabet reported negative free cash flow of $9.07 billion, exceeding the $2.70 billion loss analysts had forecast. The company also reiterated its full-year capital expenditure guidance of $195 billion to $205 billion.
Tech selloff deepens as AI spending scrutiny grows
The divergence in stock performance reflects a broader shift in investor sentiment, with markets increasingly rewarding companies that demonstrate financial discipline while penalizing those struggling to balance AI investments with profitability. Alphabet’s earnings miss was driven by weaker-than-expected revenue in its core Search business, which grew 12% year-over-year—below the 14.7% increase analysts had anticipated. The company’s $51 billion quarterly spending on data centers and equipment, more than double the prior year, contributed to its negative free cash flow for a second consecutive quarter.
Microsoft’s performance contrasted sharply, with Azure revenue growth accelerating to 48% year-over-year, exceeding both analyst expectations and management’s guidance of about 45%. The company also reported $10 billion in payments from OpenAI during the quarter, accounting for roughly 11% of its $92 billion in revenue. Microsoft’s backlog of signed but unfulfilled contracts slipped to $677 billion, with new bookings down 12% from the prior year—a decline attributed to large Azure commitments in the prior period.
FedEx raises outlook despite cost pressures
In a separate development, FedEx reported better-than-expected quarterly results Wednesday but tempered its fourth-quarter forecast due to rising transportation, labor, and aircraft maintenance costs. The company raised its full-year earnings outlook, signaling confidence in its operational efficiency despite macroeconomic headwinds.
Eli Lilly shares surge on strong demand for weight-loss drugs
Eli Lilly’s stock surged to an all-time high Thursday after the company reported a strong quarterly earnings beat, driven by sustained demand for its obesity and diabetes treatments. The company’s CEO, David Ricks, highlighted efforts to improve patient adherence to weight-loss medications, which often face discontinuation due to side effects. Lilly also noted success in the Medicare GLP-1 Bridge program, capturing seven out of every 10 new participants in the category.
Market reaction and broader implications
The tech sector’s mixed earnings reports underscore the growing divide between companies generating strong cash flows from AI investments and those struggling to monetize their spending. Nasdaq-100 futures were down more than 1% early Thursday, reflecting broader market unease amid rising bond yields and inflation concerns. Federal Reserve Chairman Kevin Warsh emphasized the central bank’s commitment to controlling inflation, despite stronger-than-expected GDP growth.
Analysts suggest the market’s reaction to Alphabet’s earnings reflects concerns over whether AI spending is detracting from core business performance, particularly in Search, where query growth has not translated into proportional ad revenue. Microsoft’s ability to maintain financial discipline while expanding its AI infrastructure appears to have reassured investors, though its backlog decline raises questions about long-term demand sustainability.
The earnings season has highlighted the high stakes of AI investment, with companies forced to balance aggressive spending against investor demands for profitability. As the tech sector navigates this transition, the divergent paths of Alphabet and Microsoft may set a precedent for how markets value AI-driven growth versus fiscal prudence.