Cloud Firms Scale Up Capex, but Expenses Are Climbing Too
The costs of AI are rising, and earnings reports this week from Alphabet, Meta, and Microsoft show that top tech companies are going full bore to keep up. At the same time, increased depreciation costs and other expenses related to growing the AI infrastructure have investors wary. Let’s take a look:
Alphabet: For the quarter ended September 30, the company posted revenues of $102.3 billion, up 16% year-over-year (y/y). Net income was up 33% y/y to $35 billion. Diluted EPS of $2.87 was up 35%. Total expenses for the quarter were $59 billion, compared to $51 billion for all of 2024. Operating expenses were up 28% to $30 billion. Capex for the quarter was $34.9 billion, up 35% y/y.
Alphabet raised its capex outlook for 2025 to $91 billion to $93 billion, up from an estimated $85 billion for the year. And the company expects to spend more next year. The increase will be accompanied by greater expenses and depreciation costs. On last night’s earnings call, Anat Ashkenazi, CFO of Alphabet said:
“Looking out to 2026, we expect a significant increase in CapEx, and we'll provide more detail on our fourth-quarter earnings call. In terms of expenses, first, as I've mentioned on previous earnings calls, the significant increase in our investments in technical infrastructure will continue to put pressure on the P&L in the form of higher depreciation expenses and related data center operations costs such as energy.”
Meta: Revenues for the quarter ended September 30 were $51 billion, up 25% y/y. Net income of $2.7 billion was down 83% y/y. Diluted EPS of $1.05 was down from $6.03 y/y, which Meta blamed on a tax rate of 87% for the quarter under new U.S. law. Total expenses were $30.7 billion, up 32% y/y and compared to 12% for the same quarter last year. Capex for the quarter was $19.37 billion, up 110% y/y.
Meta’s also raised its capex estimates for 2025 to $70-72 billion, up from its prior outlook of $66 billion to $72 billion. According to CFO Susan Li, Meta will “invest aggressively” to meet its compute needs next year by building out its own datacenters and contracting with third-party suppliers. As with Alphabet, this means capex will be “notably larger in 2026,” and with that will come expenses. Li said on last night’s call:
“We also anticipate total expenses will grow at a significantly faster percentage rate in 2026 than 2025, with growth driven primarily by infrastructure costs, including incremental cloud expenses and depreciation. Employee compensation costs will be the second largest contributor to growth, as we recognize a full year of compensation for employees hired throughout 2025, particularly AI talent, and add technical talent in priority areas.”
Investors weren’t happy with Meta’s results, which possibly raised concerns such as those that accompanied CEO Mark Zuckerberg’s big bet on the “Metaverse” a few years back. The level of investment is higher than that of Alphabet and Microsoft, which garner higher sales, and Meta’s expense level is growing. As of this writing midday on October 30, Meta’s shares had taken a 9% nosedive.
Microsoft: Revenues of $77.7 billion were up 18% y/y. Net income was $27.7 billion, up 12% y/y. But net income was affected by a $3.1 billion impact from investments in OpenAI, something investors don’t seem pleased about. And Microsoft’s new contract with OpenAI, announced this week, could come with some complications. “The combination of OpenAI’s conversion to a public benefit corp and the ongoing nature of our partnership will result in increased volatility,” said Microsoft CFO Amy Hood on last night’s earnings call. Diluted EPS of $3.72 was up 13%. Operating expenses for the quarter were $15.7 billion, up 5% y/y. Quarterly capex was $20 billion, up 78% y/y.
Microsoft is also forecasting a larger amount of spending next year. “And we continue to increase our investments in AI across both capital and talent to meet the massive opportunity ahead,” said CEO Satya Nadella on last night’s call. And CFO Amy Hood said: “With accelerating demand and a growing RPO balance, we’re increasing our spend on GPUs and CPUs. Therefore, total spend will increase sequentially, and we now expect the FY26 growth rate to be higher than FY25.”
Investors weren’t thrilled with Microsoft’s news. As of this writing, shares were down 3%.
Futuriom Take: The big cloud companies continue to ramp spending on AI infrastructure, but accompanying expenses and depreciation will be worth watching. Investors are starting to ask more questions.
