Alphabet’s negative free cash flow quarter after a capex surge underscores Moody’s warning that debt and $1.2 trillion of lease commitments are raising pressure across major AI builders.
Moody’s Ratings said the rush to build artificial intelligence infrastructure is reshaping the financial profile of major cloud and technology companies, with sector capital expenditures projected to reach $785 billion in 2026 and about $1 trillion in 2027. The ratings firm said the shift from software-led, asset-light models to asset-heavy AI buildouts is squeezing free cash flow and increasing balance-sheet risk for Microsoft, Amazon, Alphabet, Meta, Oracle and CoreWeave. Alphabet’s latest results provided a live example of that pressure. The company reported second-quarter revenue of $119.8 billion, up 24%, with Google Cloud revenue rising 82% to $24.8 billion and operating income reaching $40.8 billion on a 34% margin. But capital spending of $44.9 billion exceeded operating cash flow of $39.1 billion, leaving free cash flow at negative $5.9 billion, its first negative quarter since going public in 2004. Chief Financial Officer Anat Ashkenazi raised full-year capex guidance to $195 billion to $205 billion from $180 billion to $190 billion and signaled another significant increase in 2027. Moody’s said companies are increasingly relying on debt and off-balance-sheet financing such as long-term data center leases to fund expansion. It estimated direct debt across the six companies at about $460 billion and lease commitments at $1.2 trillion, including more than $820 billion tied to data centers still under construction. The pressure is most acute for lower-rated companies, with Oracle at Baa2 and a negative outlook and CoreWeave at Ba3 in the high-yield market, while Microsoft, Alphabet, Amazon and Meta still have some of the world’s strongest corporate balance sheets. The note also flagged circularity in the AI economy, where investments in firms such as OpenAI and Anthropic can feed demand back to the same cloud providers. Alphabet said it will rely more on third-party capacity in the third quarter while expanding its own infrastructure, naming CoreWeave and Nebius among the providers. Moody’s said investors will increasingly focus on whether the spending can generate adequate returns.