Is big tech overspending on AI? Seven charts that tell the story
Are investors right to be worried about the hyperscalers’ AI spending spree?
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Financial markets took fright in early February at the scale of spending by big US technology companies on AI infrastructure. In several cases, the announcement of increased capital expenditure (capex) was followed by a sharp share price fall. This is a concern for equity investors given how these companies dominate US equity returns due to their sheer size. The key questions are: 1) what will be the return on this investment? And 2) what are the implications for wider stock market performance?
Scale of capex still surprising
The market consensus was already anticipating a large rise in capex in 2026 compared to 2025 levels, but the scale announced by the big tech companies has still come as a surprise. As an example, Alphabet’s capex was c.$91 billion in 2025 but is now expected to more than double to $185 billion for 2026.
2025 capex spend and changes to 2026 consensus, $ billion
Source: Bloomberg, February 2026. Old and New columns reflect market consensus for 2026 capex before and after the latest quarterly announcements.
The good news is that the benefits of this investment are becoming visible in the form of higher revenues (see chart below).
Revenue revisions are coming through
Source: Bloomberg, February 2026. Chart shows constant currency revenue growth. *Only Microsoft and Meta provide guidance.
What’s more, estimates for revenue growth in outer years are also being revised higher, albeit by varying degrees depending on the company. For now, this allays fears that AI would pose a threat to these companies. Instead, they are using AI to supercharge growth in what are already very established businesses.
Outer year revenue expectations are improving, to varying degrees
Revenue revisions since the start of 2025
Source: Bloomberg, February 2026.
Today there are three broad buckets of how the capital investment is being monetised: advertising, third-party cloud services, and first-party software applications.
Within advertising, the investment is benefiting both sides of the platforms. Firstly, engagement is being maximised. For Google Search, people are spending time on Google’s own AI overviews and AI mode, rather than using alternative AI apps as some had feared. For Meta, engagement on Reels (short form video) was up around 30% year-on-year in Q4 2025 (according to their Q4 earnings call) which is very impressive for a mature product.
Secondly, the return on investment for advertisers per minute of engagement is also improving, by showing users the right advert at the right time, for example.
Meanwhile, the demand for third-party cloud rental services from developers both large (OpenAI, Anthropic) and small is supporting the rental services of Google Cloud, Amazon Web Services and Microsoft Azure, with all three noting they remain capacity constrained.
However, not all these segments appear to be getting the same resource allocation, with Microsoft seemingly prioritising its own software applications like Co-Pilot. At least for now, the monetisation doesn’t appear to be surprising to the upside to the same extent as in advertising or cloud services, hence the lower revenue revisions here.
Drop in free cash flow despite higher revenues
However, those increases in revenue that are coming through are not enough to offset the impact of higher capex on free cash flow. And this matters because free cash flow is a key measure of a company’s financial health and its ability to navigate difficulties, as well as pay debts or dividends.
The chart below shows the expected drop in free cash flow from 2024 to 2026 for the hyperscalers (Meta, Alphabet, Amazon and Microsoft). The direct beneficiaries of the spending will be Nvidia and Broadcom, who are projected to see a rise in free cash flow. And then there is Apple, which is not undertaking significant capex and therefore no negative impact on free cash flow.
Impact of capex spending visible in free cash flow fall
Source: Bloomberg, February 2026. Microsoft is year to Jun-25 and Jun-27, assuming similar capex increase y/y as Amazon, Alphabet and Meta.
Put differently, while revenues and earnings are increasing, the capital base is increasing much faster. This is having a negative effect on return on invested capital (ROIC).
The example below is Meta, which as we saw above is enjoying some of the strongest revenue growth. Meta’s ROIC was improving in 2023 and 2024 as a result of higher revenues and cost cuts. However, it started trending down again last year and is likely to continue to do so in 2026 because of the sheer scale of investments being made. It’s a similar story for the other hyperscalers.
Ongoing question marks over return on investment
Source: Bloomberg, February 2026
This begs the question: why are they spending so much? And the answer is that demand is strong. Several of the hyperscalers disclose their order backlog, which are orders that are yet to be booked as revenues. Those backlogs grew substantially in 2025 with an acceleration in the final quarter.
Demand signals look very strong
Source: Schroders, Bloomberg, February 2026
Looking at this from the opposite angle, we can dig into the data to explore how the cloud services are being used. The most notable examples are the likes of Open AI and Anthropic. The chart below shows the daily downloads of Open AI and Anthropic’s Claude assistant, and the very sharp increases since late 2025.
Daily install counts of AI coding assistants in visual studio code
Source: Bloomberry.com, February 2026
The speed of development of new AI tools is testament to the ongoing growth of the industry. Innovation is continuing apace. There are a lot of developers working on a lot of different applications very quickly right now.
It may be that the scale of the demand for AI compute capacity does justify the investments being made, and the returns will follow. Until those returns are more clearly visible though, it could be more difficult for these stocks collectively to outperform.
In turn, that could weigh on overall returns for US indices like the S&P 500 given these stocks make up such a large part of the overall index. Investors passively tracking such indices would be exposed. Active global equity approaches have the flexibility to navigate these kinds of changes in the market and look for the most compelling opportunities regardless of country or sector.
It may also be the case that one company proves more successful at this than another. An active investment approach, with a focus on stock level research, is the key to identifying winners from losers. Within the global equities team at Schroders, our focus is on identifying “growth gaps” where the market is mispricing a company’s future growth. The market consensus tends to extrapolate the past, be backward-looking, and be quite short term. That creates an opportunity to add value by focusing on those future growth prospects that aren't yet understood by the market.
Any reference to sectors/countries/stocks/securities are for illustrative purposes only and not a recommendation to buy or sell.
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