Original Author: Zhang Yaqi

Original Source: Wall Street Insights

The AI arms race among tech giants is facing the ultimate test of investor patience. Microsoft, Meta, and Amazon released their quarterly earnings reports this week, with attention shifting from revenue growth to a more fundamental question: when will the continuously expanding capital expenditures actually yield returns?

The backdrop of this test is a live lesson that Alphabet showcased last week. The company announced its highest quarterly profit in history, reaching $112.1 billion, but its stock price subsequently dropped over 7%—the reason being investors' caution about the company raising its 2026 capital expenditure forecast by $15 billion.

This year, the combined capital expenditure of Alphabet, Microsoft, Meta, and Amazon is expected to reach $700 billion, with Wall Street predicting this figure might surpass $1 trillion by 2027.

The fragility of market sentiment has set the stage for the earnings season of the three companies this week. According to Bloomberg, citing views from UBS Global Wealth Management, "The visibility of capital expenditure after 2027 is limited, combined with an increased demand from investors for spending discipline, which may continuously suppress risk appetite." Meanwhile, Moody's, a subsidiary of Fitch Ratings, warned last week that the ongoing capital expenditure plans could "threaten credit quality," as the combined direct debt of six major tech companies totals about $460 billion.

Microsoft: Strong Azure Momentum, Copilot Monetization Enters New Phase

Among the three companies, the expected pressure faced by Microsoft may be the clearest. Analysts expect Microsoft's capital expenditure this quarter to increase by 74% year-on-year. Meanwhile, the market holds high expectations for the growth of Azure cloud services.

According to a Morgan Stanley research report, analysts are confident that Microsoft's Azure will achieve approximately 41% constant currency growth in the fourth fiscal quarter, exceeding management's upper guidance of 39% to 40% by about 1 percentage point. Morgan Stanley's confidence comes from: positive feedback from channel partners, improved GPU supply capabilities, and the firm's own survey results of Chief Information Officers (CIOs)—in cloud migration scenarios, 72% of CIOs expect to increase investments in Microsoft solutions in the upcoming year, and Microsoft leads all vendors in anticipated share of incremental IT budgets.

The commercialization progress of Copilot is also receiving significant attention. In the third fiscal quarter, Microsoft M365 Copilot paid seats increased from 15 million to 20 million, with management guiding that net new paid seats will continue to rise on a quarter-on-quarter basis. Morgan Stanley points out that the monetization path for Copilot is evolving into three parallel growth mainlines: direct seat sales, users transitioning to higher-value E7 subscription plans, and usage-based pricing for AI services. Notably, the price increase for Microsoft's commercial version of M365 will take effect on July 1, 2026, for new customers, and Morgan Stanley estimates that this pricing adjustment will contribute about $2 billion, $4 billion, and $6 billion in incremental revenue during FY27 to FY29, respectively.

On the issue of capital expenditure, Morgan Stanley believes that street predictions remain conservative, with room for further upward adjustments. Management previously disclosed that its capital expenditure for the calendar year 2026 is expected to be around $190 billion, of which about $25 billion is due to rising component prices. The firm maintains Microsoft's "Overweight" rating with a target price of $600, arguing that the current approximate 16 times FY28 expected price-to-earnings ratio is "too cheap," failing to adequately reflect the company's ongoing high growth potential.

Meta: User Growth Peaks Under Pressure, Possible Further Significant Capital Expenditure Increase

The situation for Meta is more complex. According to Bloomberg, citing Bloomberg Industry Research (BI) analysis, Meta may "significantly" raise its capital expenditure guidance to address pressure from rising component costs—this was the core trigger for Alphabet's stock price drop last week.

At the same time, user growth is facing new pressure from regulatory bodies. With regulatory agencies around the world advancing legislation to limit youth use of social media, Meta's user growth outlook will face greater strain. The "Daily Active Users" metric measuring the four core products is expected to record the weakest growth since 2021.

Amazon: AWS Growth May Hit New High Since 2022

In contrast to Microsoft and Meta, market expectations for Amazon's earnings report appear relatively optimistic. According to Bloomberg, citing Truist's analysis, Amazon's overall revenue growth could reach 17%, the highest in nearly five years; Amazon Web Services (AWS) growth is expected to exceed 30%, marking a new high since 2022. Strong demand for AI-related services is viewed as the core driver of AWS growth.

However, Amazon also faces inquiries regarding capital expenditures. After Alphabet raised spending forecasts triggering a stock price drop, investors are highly alert to whether the three companies will further raise their capital expenditure outlook for 2027 and beyond.

Fitch Warns: Balance Sheets Under Pressure, Credit Risks Emergent

Moody's issued a research report last week that set a severe tone for the earnings season this week. The agency noted that Alphabet, Microsoft, Amazon, Meta, Oracle, and CoreWeave are transitioning from asset-light models of software, intellectual property, and cloud services to capital-intensive models requiring "unprecedented investment levels," a trend that could pressure credit metrics for these companies.

Moody's Vice President Kevin McNeil stated in the agency's podcast: "These companies are all large firms with solid market positions and, in many cases, impeccable balance sheets, but they are initiating almost unprecedented capital investments. The increase in capital intensity may lead some companies to have negative free cash flow, or at least to see a noticeable contraction." He further pointed out that debt financing "could raise leverage ratios and pose additional risks to balance sheets."

Among the six watched companies, Oracle's situation is the most precarious. Moody's adjusted its credit rating outlook for Oracle to negative, placing its Baa2 rating just two notches above junk status. Just last month, another rating agency, S&P Global, similarly downgraded Oracle to just one grade above investment grade. In contrast, Alphabet, Amazon, Meta, and Microsoft still maintain solid balance sheets, and their investment grade ratings are secure in the short term.

Bulls vs. Bears: Will AI Investment Eventually Pay Off or Overextend the Future?

In the face of continuously expanding capital expenditures, a clear division has formed within the market. The core logic of the bulls is: real demand exists, and the constraint on growth is supply, not demand. Taking Azure as an example, Morgan Stanley pointed out that Microsoft's CFO Amy Hood explicitly stated in the last fiscal quarter earnings call that Azure's guidance is essentially "allocated capacity guidance," and the constraints on growth come from data center construction progress and GPU deployment timing, not customer demand. As Microsoft plans to double its total data center capacity in the next two years, this constraint is expected to gradually ease.

The bears, on the other hand, focus on the lack of visibility regarding returns. UBS Global Wealth Management indicated that "the limited visibility of capital expenditures after 2027" is a key factor suppressing investor risk appetite. Moody's warnings are more direct: the shift from asset-light to asset-heavy models is eroding these companies' historically proud high free cash flow advantages.

For long-term investors, UBS still recommends holding steady: "For long-term investors with diversified allocations, maintaining investments is the most effective strategy to cope with current uncertainty. Given strong earnings growth and an improving cyclical backdrop, attractive stock opportunities exist across sectors and regions." However, in light of Alphabet's cautionary example, the market has made it clear: Good performance is not enough; financial discipline is also required.

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