1 hyperscaler megacap down, 3 to go. Alphabet raises the stakes on AI spending

One gone, three to go. Alphabet reported Big Tech earnings this week and informed Wall Street that it plans to spend more on artificial intelligence than previously expected. The question now is whether fellow club names Amazon, Meta Platforms and Microsoft will follow suit when they report next week. "Capital spending trends will be the number one focus," Jeff Marks, the club's portfolio director, said during the Morning Meeting on Friday. That's because investors are no longer giving companies free rein on ever-increasing capital spending, but are increasingly demanding monetization, or at least visibility into making money, on all their infrastructure investments. (We explored this concept of “AI rationalization” in a recent Club Check-In video.) This is also why hyperscaler stock prices have been declining in recent weeks. On the one hand, they know they have to keep spending to keep up. On the other hand, rising capital expenditures are putting pressure on companies' ability to generate free cash flow (FCF), a critical measure of their financial well-being. “They're spending because they see the demand and they don't want customers to go elsewhere,” Jeff said. “But you can't ignore what's being done to free cash flow.” GOOGL YTD mountain Alphabet YTD Alphabet tried to thread that needle on Wednesday evening by raising its 2026 capital spending forecast by $15 billion at the midpoint to a range of $190 billion to $205 billion, and reiterated that spending will rise further in fiscal 2027. Heavier investment pushed second-quarter FCF into negative territory, with an outflow of $5.8 billion. This was the first negative quarterly reading in the company's history. Capex guidance overshadowed an impressive quarter, notably the 82% year-over-year increase in Google Cloud revenue. Despite strong cloud growth, Jim Cramer said Google is uncomfortable with the level of capital spending its parent company has announced and is grappling with the increasingly expensive price tag attached to that growth. Alphabet has been on a downward trend since it announced plans to sell $85 billion worth of shares to offset expenses. On Thursday, the day after earnings, the stock fell 7% on Thursday after back-to-back losses. The stock rose modestly Monday and Friday, but was down nearly 8% over the past five days, on track to become our third-worst-performing stock of the week. Shares of Meta and Amazon weren't doing well this week; decreased by approximately 7% and 6%, respectively. Microsoft shares are down more than 2% year to date. While Meta and Microsoft report earnings on Wednesday evening, Amazon remains out of stock after the closing bell on Thursday. It may be the most closely watched Meta of the three. META YTD Mountain Meta Platforms YTD Facebook and Instagram companies are already increasing spending to build the massive computing infrastructure needed to support AI goals. Soon, Meta is preparing to launch a public cloud business to sell excess computing capacity to external customers and offer another way to monetize those investments. Investors have already shown that they can punish Meta when spending increases faster than expected. Last quarter, Meta raised its 2026 capital spending forecast to between $125 billion and $145 billion, with a $10 billion increase to $135 billion at the midpoint, citing higher costs for memory, chips and other data center components. Following the report, shares lost 9 percent of their value. At the time, Jim thought Meta didn't have the same leeway as other hyperscalers because it didn't have a cloud. Now that cloud plans are revealed, perhaps Meta can find more room to spend. Free cash flow will be a key item next week, but last quarter FCF rose a healthy 20% and beat estimates. AMZN YTD mountain Amazon YTD Alphabet's results for Amazon probably offered the clearest justification for continued heavy spending. Google Cloud's growth and increasing backlog suggest that enterprise demand for AI computing remains strong and provides an excuse to continue spending and development. This is a positive signal for Amazon Web Services, the world's largest cloud infrastructure provider. Amazon has already committed huge sums to expand AWS capacity, including data centers and networking equipment. Custom AI chips are becoming more important at Amazon, just as they are at Google. Last quarter, Amazon left its 2026 capex forecast unchanged at around $200 billion. We knew back in May that Amazon was forecast to have negative free cash flow this year. That's why Amazon is tapping into the corporate bond market to reduce the impact of its capex. MSFT YTD mountain Microsoft YTD Microsoft will face a similar test with its cloud business Azure. The cloud and software giant, which operates on a different fiscal calendar than its Big Tech peers, announced in April expected capital spending of approximately $190 billion for calendar 2026. The company's free cash flow has come under pressure in recent quarters. While underlying demand for Azure is encouraging, as we've seen with Alphabet, strong demand alone may not be enough to satisfy investors. Microsoft is one of the worst-performing megacap tech names, down 20% this year. Unlike Amazon and Google, Microsoft has large exposure to enterprise software through its Office suite and other platforms. Software stocks have been crushed by the thought that artificial intelligence could disrupt business. Last month, Starbucks said it planned to spin off software tools from Microsoft and IBM and use artificial intelligence to make them in-house. The concern took hold recently after IBM announced expectations for a soft quarter and lowered its outlook. In one bright spot, earlier this month a Citi analyst spoke out against Microsoft's much-maligned Copilot AI assistant. Although Jim was amazed by the research, any improvement in Copilot would make Microsoft's software offerings more attractive. (Jim Cramer's Charitable Trust is long GOOGL, AMZN, META, MSFT. See here for a full list of stocks.) When you subscribe to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trading alert before buying or selling a stock in his charitable foundation's portfolio. If Jim talked about a stock on CNBC TV, he would wait 72 hours after issuing the trading alert before executing the trade. THE ABOVE INVESTMENT CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY, TOGETHER WITH THE DISCLAIMERS. 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