Amazon, Microsoft and Alphabet Report Wednesday in a Test of AI Cloud Spending

Amazon, Microsoft and Alphabet report earnings on Wednesday, and Wall Street expects faster growth in their cloud businesses, even as a turbulent market selloff and rising costs of funding artificial intelligence work temper optimism, according to Reuters.

Investors are pressing for evidence that the AI boom can deliver swift returns to justify its price tag. Rising bond yields at AI cloud providers such as CoreWeave and record costs to insure Meta Platforms’ debt have added to concern about how the buildout of AI infrastructure is being paid for, while higher United States interest rates loom, Reuters reported.

The three companies plan to spend as much as $600 billion this year and hold nearly $1.7 trillion in combined backlog, Reuters reported. Their results will test whether cloud growth and commentary from executives can support that spending.

What the forecasts show

Google Cloud is expected to lead the three in the September quarter, with revenue rising 95.1% to $29.57 billion, according to LSEG data cited by Reuters. That would be faster than the 81.8% growth in the prior quarter. Amazon Web Services, the market leader in cloud, is expected to post 38.2% revenue growth, up from 36.8% in the prior quarter. Microsoft Azure is expected to expand 47.7%, up from 42% three months earlier, according to Visible Alpha data.

Microsoft is expected to report total revenue of $90.66 billion, up 16.7%, with Azure sales of $33.06 billion, Reuters reported. Alphabet’s total revenue is expected to rise 25.2% to $128.18 billion, while growth in Google search revenue is expected to slow to 14.7% from 16.8% in the prior quarter. Amazon’s overall revenue growth is expected to slow to 12.3% from 19.6% in the prior quarter. Alphabet and Amazon are expected to burn cash for the second and third consecutive quarters, respectively, while Microsoft is expected to generate more than $8 billion in cash flow.

Microsoft will report under a new structure for the first time on Wednesday, Reuters reported. Cloud, AI and business software will be grouped into a division called “Agents and Infra,” and Windows, gaming and ad sales into another called “Devices and Consumer.” The change will also bring the first disclosure of Azure’s quarterly revenue in dollars, after years in which Microsoft reported only growth rates for the unit.

Why Meta’s results set the tone

Meta’s results last week showed how strict the market’s judgment has become, Reuters reported. Revenue growth beat expectations and the outlook was upbeat, but larger spending plans sent Meta shares down nearly 7% the next day. Meta shares are down more than 4% this year. By comparison, the three companies reporting on Wednesday have gained between 1.2% and 10.1% this year, while the S&P 500 has risen nearly 12%.

“The appetite for capital expenditure alone is slowing rapidly,” Brian Mulberry, chief market strategist at Zacks Investment Management, told Reuters. “For Amazon, Google and Microsoft specifically the growth in their cloud companies is a very important line item that will signal if further growth in capital expenditure can be funded without further risks of contracting free cash flow.”

Market turmoil has also revived warnings of an AI bubble from investors, including Citadel founder Ken Griffin, Reuters reported. Some companies have delayed their initial public offerings. Reuters also reported that an expected Democratic sweep of the midterm elections could bring more trouble for data centers, which already face protests over their effects on power grids, electricity bills and the environment.

“This quarter, we believe commentary is equally important to quantitative results as competition for search is growing again with agents while there is increased consternation around the payback of AI capital expenditure,” Citizens analyst Andrew Boone told Reuters.

Reporting based on coverage by Reuters.