- AI demand remains strong, but investor focus has shifted to FCF and cash conversion
- Hyperscalers are diverging as core cash generation gaining investor attention
- Selectivity is increasing across AI infrastructure, with power equipment standing out
- Share price performance will be driven by a combination of earnings, cashflow, and capex directions
Latest results from major global technology companies reinforce the strength of AI infrastructure demand while showing more selective market behaviour. Cloud businesses accelerated, with Google Cloud, Azure, and AWS reporting high double-digit revenue growth despite an already high comparison base. Disclosed backlogs and commercial remaining performance obligations (RPOs) across the three providers reached a new high of USD1.8tn as capital investment plans remain elevated, with no broad retreat in spending. The underlying AI investment case has not broken, but the debate has shifted towards cash conversion.
Hyperscalers: cloud growth alone is no longer enough. Heavy spending on infrastructure buildout is pressuring free cash flow (FCF) and pushing players towards greater reliance on external funding. Alphabet and Meta reported negative quarterly FCF, while Amazon‘s trailing 12-month FCF is also headed into negative territory. Microsoft’s cashflow, meanwhile, was firmly positive despite falling 27% y/y. With insufficient operating cashflow to cover capex, hyperscalers have turned to debt and equity markets at scale. Bond issuance rose sharply, buybacks were curtailed or paused at several companies, and some have started issuing equity. The shift is increasingly weighing on investor sentiment as the market questions the cost of capital and the durability of the funding model, even as cloud growth remains strong so far.
As such, the market is starting to put more emphasis on the resilience of core businesses on top of cloud momentum. Alphabet’s Search growth slowed with management citing lower monetisation in its AI Mode. Amazon’s revenue and holiday-quarter sales outlook missed expectations even as its operating margin reached a record high. On the other side of the spectrum, Meta’s ad revenue surged on the back of a fair pickup in ad impressions and average ad prices, though this remained insufficient to fully offset its elevated capex needs. Microsoft’s enterprise software business offered a solid foundation with commercial Microsoft 365 seats continuing to grow and Copilot adoption accelerating, helping to support Azure momentum and underpin the hyperscaler’s positive FCF.
The picture is therefore not one of uniform deterioration, but of differing cash-generation trajectories against increasingly demanding investment commitments. Share prices have reflected these distinctions accordingly, with Alphabet and Meta selling off following their results, while Microsoft initially rose in extended trading. Cloud growth remained important, but investors also weighed revenue expectations, guidance, and the rising funding burden of infrastructure expansion.
Infrastructure: strong demand, selective rewards. The same selectivity appeared among infrastructure suppliers. Upstream AI hardware and semiconductor names delivered solid, although less uniformly explosive, results relative to elevated expectations, contributing to a sense that both market enthusiasm and the steepest phase of the growth trajectory may be peaking for now. Notwithstanding that the root cause was in fact led by capacity constraints rather than demand weakness.
Power-supply equipment and infrastructure companies stood apart and were generally better received. Vertiv reported strong sales growth, with organic orders more than doubled, while GE Vernova saw a near doubling in organic growth, with backlog reaching USD197bn. Management raised revenue, adjusted EBITDA margin, and FCF guidance, with notable pricing power in gas turbines. Power and cooling remain among the most visible infrastructure constraints.
Earnings: A higher hurdle for differentiation. Earnings growth, though still robust in itself, is starting to show signs of peaking as upward market revisions to both capital expenditure and earnings have evidently slowed compared with prior quarters. Share price performance will be driven by a combination of revenue, earnings quality, and the sustainability of cashflow. Strong results are being acknowledged, but they are being filtered through a tighter lens of cash generation, core business strength, and visibility of bottlenecks.
Latest results remain robust and continue to affirm our investment convictions on the strong underlying demand for AI infrastructure, with spending plans still largely in place. Investors, however, have clearly tightened their filters. The latest focus is on financial discipline and the use of capex, just as much as on cloud performance itself. This environment demands greater selectivity, but we advise investors not to be overly concerned about near-term FCF and to stay engaged with long-term winners and areas that will continue to benefit from the insatiable demand for AI compute and the embedded business opportunities. Anthropic’s latest assessment is a clear example: the company’s S-1 IPO filing forecasts an explosive total addressable market (TAM) of USD30-40tn with solid Annualised Run Rate (ARR) momentum and rising monetisation capabilities.
Our preference remains with quality hyperscalers and technology leaders that demonstrate a clear path to cloud monetisation alongside a manageable FCF trajectory supported by resilient core businesses, as well as companies positioned at the most visible bottlenecks, such as power equipment and related infrastructure within the picks-and-shovels complex.
Figure 1: Cloud growth remains robust…
Source: Companies, DBS
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