Amazon and Google shares plunge: The AI bill is coming due
Until now, Wall Street has been treating generative artificial intelligence (AI) as a license to justify virtually any valuation, no matter how lofty.
Aggressive spending today to dominate the architecture of tomorrow’s economy has led equity and bond investors to fall over themselves to avoid missing the next transformation of humanity.
However, over the last 24 hours, the market’s patience seems to have cracked.
If you haven’t already seen, disappointing third-quarter earnings reports from both Amazon and Alphabet (Google) also revealed that massive capital expenditure (capex) budgets are eating into cash flows faster than AI revenues can replenish them.
Both company’s stock prices have fallen sharply – including a 6.5 per cent after-hours slide for Amazon and a record single-day drop of 10 per cent for Alphabet.
Over three decades, one thing I see markets and investor frequently reject is poor asset turnover data. Spending money on assets with the promise those assets will eventually generate greater revenue, initially excites investors. But eventually, and almost always, those investors grow weary of waiting. Shares price collapse.
It’s as simple as that, and it’s what is happening right now.
Amazon’s free cash flow collapse
As I write, Amazon’s earnings report has caused its share price to slide in extended trading.
Over the 12 months ended September 30, 2026, Amazon recorded negative free cash flow of US$42.4 billion – a sharp reversal from the positive US$14.8 billion generated in the previous 12-month period.
This is due to a US$94.8 billion spike in purchases of property and equipment, almost entirely dedicated to powering AI workloads and building out data centres. And if that seems extreme, Amazon expects its 2026 cash capital expenditures to hit US$220 billion, with CEO Andy Jassy cautioning that the company plans to spend “meaningfully more” in 2027.
While Amazon’s revenue rose 12 per cent to US$201.9 billion (just missing estimates of US$202.2 billion) and net income arrived at US$20.7 billion – investors balked at the sheer speed of cash burn.
Even Jassy’s disclosure that AWS’s commercial backlog grew to US$578 billion (up from US$496 billion in Q2) failed to stop the selloff. The market’s anxiety isn’t about whether customers want AI capacity – it’s about how much capital it takes to deliver it.
Alphabet’s cash flow burn and search stagnation
The day before Amazon’s results, Alphabet shares experienced a similar slide. Despite Google Cloud revenue doubling by 103 per cent to US$30.7 billion, Alphabet’s total quarterly capex jumped 114 per cent year-over-year to US$51.4 billion. This pushed Alphabet’s free cash flow to negative US$9.1 billion for the quarter.
|
Metric |
Alphabet (Q3 2026) |
Amazon (Q3 2026 / TTM) |
|
Quarterly revenue |
US$127.6B (+25 per cent YoY) |
US$201.9B (+12 per cent YoY) |
|
Capital expenditure |
US$51.4B (Q3) / ~US$200B (2026E) |
US$94.8B increase / US$220B (2026E) |
|
Free cash flow impact |
-US$9.1B (Q3 FCF) |
-US$42.4B (Trailing Twelve Months (TTM) Free Cash Flow (FCF)) |
|
Primary friction point |
Search ad growth slowing to 12 per cent |
Ad growth halving to 12 per cent YoY |
|
Stock price impact |
Down 8 per cent to 10 per cent |
Down 6.5 pre cent in after-hours |
For Alphabet, the capex drag was compounded by a slowdown in its core business. Google Search revenue grew just 12 per cent, a sharp deceleration from prior quarters, raising uncomfortable questions about whether generative AI tools and conversational search agents are beginning to disrupt traditional digital advertising.
Lessons
Amazon and Google’s wobbles are signalling a shift in how investors value exposure to the AI promise.
Between Amazon’s US$220 billion guidance and Alphabet’s US$200 billion allocation, two companies alone are pouring nearly half a trillion dollars into capex for physical servers, land, chips, and power infrastructure this year.
As I have reported many times, these monopolies enjoyed deep, wide business moats, with none competing directly with the others. In fact, they were so dominant, they enjoyed rising returns on equity, even as their equity grew at double digit rates.
For years, they also earned premium valuations because they were capital-light, high-margin businesses. They’re now competing directly with each other, and in their race to do so, they’re becoming heavy-industrial infrastructure providers.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
He is also author of best-selling investment guide-book for the stock market, Value.able – how to value the best stocks and buy them for less than they are worth.
Roger appears regularly on television and radio, and in the press, including ABC radio and TV, The Australian and Ausbiz. View upcoming media appearances.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
