Both firms spent big on AI in the September quarter, yet one kept free cash flow positive
Microsoft and Alphabet earnings split on 28 October: Microsoft shares rose, and Alphabet shares fell, TF reports. Same boom, different outcomes. One company funds the build-out from cash, and the other burns cash.
What’s Happening & Why It Matters
Microsoft Posts a Clean Beat
Microsoft (@Microsoft) reported first-quarter revenue of $92.3 billion (about €82.1 billion), up 19%. Net income reached $36.6 billion (about €32.6 billion), up 32%, and diluted earnings per share were $4.92. Microsoft Cloud revenue came to $63.9 billion (about €56.9 billion), up 30%, and Azure grew 48%. Commercial contracted backlog jumped 73% to $677 billion (about €602 billion).
The weak spots are in consumer lines. Devices and Consumer revenue fell 3%, Xbox hardware dropped 14%, and Windows OEM revenue fell 22%. Microsoft gave no Copilot sales figure, though the company credits Copilot with 5% growth in Microsoft 365 commercial seats.
Spending Stays Under Forecast
Capital spending totalled $45.2 billion (about €40.2 billion), up from $34.9 billion a year earlier but below analyst forecasts. Operating cash flow reached $45.1 billion, and free cash flow was $18.6 billion (about €16.6 billion). Finance chief Amy Hood expects free cash flow to stay positive through fiscal 2027.
Anthropic adds to the backlog. Its S-1 filing commits to at least $44.9 billion (about €40 billion) of Microsoft compute through 2033. TF covered the filing in Anthropic’s IPO Filing Warns of Bioweapons Misuse, Model Blackmail and Risks to Humanity. Microsoft shares rose 3% to 4% in after-hours trading.
Google Cloud Doubles While Search Slows
Alphabet reported revenue of $127.6 billion (about €113.6 billion), up 25% and close to the $127.9 billion forecast. Google Cloud revenue more than doubled, up 103% to $30.7 billion (about €27.3 billion). Segment operating income was $11.1 billion (about €9.9 billion), for a 36.2% margin.
Search and other revenue grew 12% to $63.4 billion, slowing from 17% in the second quarter. YouTube ads grew 9%, after 13%. Alphabet blames AI answers in search, which raise query counts but show fewer ad pages, and calls the drag temporary.
Capex and Cash Burn Weigh on Alphabet Shares
Capital spending reached a record $51.4 billion (about €45.7 billion), more than double the $24 billion of a year earlier. Free cash flow was negative $9.1 billion (about €8.1 billion), the second consecutive negative quarter. Earnings per share fell to $2.12 from $2.87, after an $8.7 billion (about €7.7 billion) loss on equity stakes. One outlet ties much of the loss to a SpaceX holding.
Alphabet kept its 2026 capex guidance at $195 billion to $205 billion (about €174 billion to €182 billion). The company expects 2027 spending to rise by a large margin. Alphabet raised $84.8 billion (about €75.5 billion) in equity in June, including $10 billion from Berkshire Hathaway. Alphabet shares fell between 8% and 10% after hours. TF covered a similar equity raise in Meta Plans $95 Billion Stock Raise to Fund AI Build-Out.
My take: Cloud growth of 103% is stunning, and the market missed it. Investors ask who pays for the build-out. Microsoft pays from cash and signed customers. Alphabet leans on shareholders. Microsoft cut headcount through buyouts, as TF reported in Microsoft Offers Buyouts to 60,000 Employees as AI Spending Climbs. Cash discipline is the story of the quarter.
TF Summary: What’s Next
Alphabet will give 2027 capex guidance on its fourth-quarter call, and analysts expect a very large figure. Microsoft will report its next quarter in late January. Investors will watch whether Google Cloud growth outweighs the deceleration in search.
MY FORECAST: Alphabet will guide 2027 capex above $250 billion. Microsoft will keep free cash flow positive through the December quarter. Alphabet shares will trade below their 28 October close until the February results.
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