What the results really signaled
After quarters of ever-bigger AI budgets from the cloud giants, Microsoft and Alphabet just flashed cooler near-term caps. Both reported capital outlays that missed analyst expectations: Microsoft cut its full-year target to $170 billion from $175 billion, while Alphabet left its range unchanged at $195 billion to $205 billion.
Alphabet missed on earnings and revenue and posted negative free cash flow exceeding $9 billion. Its shares fell about 10% in late trading. Some holders stayed loyal. "We are pleased with what we see and what we heard, and trust management's approach to their AI spending," Chris Ballard, managing director at Check Capital Management, wrote to CNBC.
Microsoft topped estimates on both earnings and revenue, with its Azure cloud unit's sales jumping 48% providing the lift. Across the sector, forecasts call for hyperscaler capex to surpass $1 trillion next year, with some projections pointing to further increases beyond that.
Supply snags, neocloud strain
Microsoft CFO Amy Hood said third-party providers of graphics processing units are running behind, pushing some capacity into the first half of 2027. She did not name vendors, but Microsoft uses CoreWeave, IREN and Nebius, among others. Alphabet CFO Anat Ashkenazi added that outside computing power "came online only at the very end of Q3."
That backdrop weighed on the neocloud cohort, with CoreWeave, Nebius and IREN sliding, and Oracle - a major AI infrastructure spender - also down. Funding is another squeeze. Neoclouds need billions in outside capital but lack investment-grade ratings, and with rates up and debt concerns rising, lenders are retreating from the market.
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Gartner told CNBC it expects that 80% of neocloud companies will be acquired or shut their doors by 2030. Nvidia-backed Firmus in Australia pulled its IPO plans earlier this month even with substantial usage commitments from Meta and OpenAI. Nscale filed to go public in September and has not updated its prospectus in weeks.
The next markers to watch
Delays from emerging neocloud partners have hit Microsoft before, but they matter more now with Anthropic preparing to go public. Anthropic leans on Amazon, Google and Microsoft for most of its computing needs, while also tapping SpaceX, Lambda and Nscale. At times this year, demand spikes have made its Claude assistant unavailable. OpenAI, a rival, says a 2027 initial public offering is likely and it is still hunting for more capacity.
Amazon reports after the close on Thursday, offering one more read on hyperscaler spending this quarter. Meta last week guided full-year capex to $135 billion to $145 billion, lifting the bottom from $130 billion, and its shares fell after it reported negative free cash flow. Looking ahead, Microsoft's Hood said she expects an acceleration in the first half of 2027 as component costs rise and delayed deliveries arrive.
What it means for your portfolio
The bottom line: long-term AI spend still looks hefty, but the near-term build may be choppier as supply timing and financing pressure smaller players. Regarding Microsoft, a team at Cantor headed by Thomas Blakey wrote, "We view the quarter as further validation of Microsoft's AI-led growth opportunity," kept a buy rating, and shifted the 12-month price target from $608 to $630.
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