AI spending worries grow

Vicky McKeever | Morningstar

Key takeaways

• Intel shares plunged after providing weaker-than-expected revenue guidance for the fourth quarter.
• Hyperscaler Amazon missed third-quarter estimates and reported a jump in negative free cash flow.
• This comes a day after Alphabet stock saw its worst session on record after disappointing results.

Tech stock selloff ripples through supply chain

The earnings have added to investor concerns about whether tech companies’ massive spending on AI will pay off.

Ipek Ozkardeskaya, senior analyst at Swissquote, highlights that together, Amazon, Alphabet, Microsoft (MSFT) and Meta (META) spent more than USD 200 billion on capital investment in the third quarter alone. She says that for the first nine months of the year, this brings the bill to just over USD 500 billion, with full-year spending expected to hit around USD 735 billion: “The AI race is getting very, very expensive.”

Dan Coatsworth, head of markets at AJ Bell, says that this means nearly $3 trillion has been wiped off the index since its peak on Oct. 6.

“Investors are increasingly unhappy at the huge sums of money being spent on AI infrastructure without a clear road map for when, or whether, those investments will deliver a sufficient return,” he says. “That means investors are increasingly questioning if money is being spent wisely.”

Coatsworth says major tech companies are “going all-in with their bets that AI will be the biggest thing in decades to transform business and consumer life,” but adds that if they’re wrong the “fallout could be huge.”

Morningstar’s view on Intel, Amazon and Alphabet earnings

Intel earnings: PC winter has arrived, offsetting healthy AI growth; FVE to $85 From $105

Intel reported third-quarter revenue of $16.5 billion, up 21% year over year and above its $16.3 billion guidance midpoint. Intel expects December quarter revenue of $15.5 billion, up 13% year over year but short of FactSet consensus estimates of $17.3 billion.

Why it matters: Intel gave investors an ugly outlook because weak demand for PC processors (CPUs) and higher memory chip prices are suppressing unit demand. Intel expects PC unit sales to decline 12% in 2026 (down 20% in the second half of 2026) and another 10% in 2027.

• Despite the focus on AI and Intel’s manufacturing (Foundry) business, its PC business still accounts for 50%-60% of revenue in a normal quarter. Intel doesn’t expect the memory crunch to abate soon (nor do we). Intel forecasts total revenue growth in 2027, but PC softness will stunt it.
• We remain encouraged with Intel’s server CPU business and agentic AI demand, as its data center segment revenue rose 17% sequentially and 78% year over year. However, Intel remains supply constrained in server CPU manufacturing and substrates, which may cap its near-term upside.

The bottom line: We lower our fair value estimate for no-moat Intel to $85 from $105 as we cut our near-term PC CPU revenue estimates. Intel’s PC revenue was resilient in the first half of 2026 despite high memory prices, but the slowdown is now arriving and hitting the company aggressively.

• Shares fell as much as 21% after hours on the soft outlook, and we think the selloff is largely justified. We think shares are modestly undervalued, but we retain our Very High Morningstar Uncertainty Rating and acknowledge a host of risks as Intel remains in turnaround mode.

Coming up: Intel also faced a tragic manufacturing accident in Israel in mid-October that will provide headwinds of $300 million in revenue and 200 basis points to gross margin in the fourth quarter. Similar headwinds may also affect first-quarter results.

Amazon earnings: Cloud demand improves, but cash recovery is further away

Amazon's third-quarter revenue rose 12% to $202 billion and operating margin reached 13.9%. Updated guidance was roughly in line with expectations, although the shares fell roughly 7% after hours.

Why it matters: We would characterize Amazon's earnings as pretty good overall, although the reality of exactly how much cash the artificial intelligence buildout is going to cost is becoming more noticeable.

• Amazon Web Services grew 39%, an acceleration from 37% last quarter, and management expects growth above 40% in both 2027 and 2028. These are solid results. However, everyone remains worried about the cost of this growth.
• Capital expenditures were reiterated at $220 billion for the current year, with 2027 levels now characterized as "meaningfully more" compared with 2026. While the step-up wasn't unexpected, it was incrementally more explicitly aggressive.

The bottom line: We are lowering our fair value estimate to $280 per share from $300 for wide-moat Amazon as we transfer coverage. We meaningfully raised our revenue and earnings per share forecasts as we re-modeled capex and AWS growth (both higher) and also raised the capital intensity of our long-term forecasts.

• Higher capital intensity is the main driver of the negative valuation revision, as we assume returns on invested capital are range-bound in the midteens. This push and pull between higher capital intensity and higher growth is the key tension between bulls and bears today.
• The shares are now trading at roughly a 20% discount to our fair value estimate, which we believe is skewing the risk/reward ratio more positively. We think these AI investments will pay off, with free cash flow recovering in 2028 and beyond.

Key stats: Other segments generally met our expectations, although advertising growth of 11% was a bit light. Management characterized this as driven by Prime Day and the timing of sporting events and expects a reacceleration to high-teens growth next qua

Alphabet earnings: AI monetization continues to grow as hardware sales boost results

Alphabet's third-quarter results include sales growing 25% to $128 billion. The firm's operating margins expanded 130 basis points to 31.8%. Google Cloud sales grew 103% to $31 billion, and now constitute 24% of the firm's top line, up from 15% a year ago.

Why it matters: Alphabet's overall business continues to be boosted by artificial intelligence. The core search business is proving to be more resilient than many investors feared, up 12%. We attribute this strong growth to AI overviews and AI mode growing total search queries, as well as improving AI-driven ad targeting.

• AI's main beneficiary, without a doubt, is Alphabet's cloud business. Not only is the segment's growth stellar, its backlog, or future contracted revenue, is five times annualized quarterly sales, providing the business great visibility as it invests in AI infrastructure.
• Within cloud, we see TPUs, Alphabet's AI accelerators, as a key differentiator. As Alphabet moves from renting out TPUs to actually selling them to external customers including Anthropic, and recently Oracle, we expect Google Cloud revenue to meaningfully inflect upward.

The bottom line: We raise our fair value estimate for wide-moat Alphabet to $450 from $433, and continue to view shares as attractively priced. We believe that investors are underappreciating the breadth and depth of Alphabet's AI monetization and the rapid upcoming growth in Google Cloud.

• We also believe that Alphabet's vertical integration allows it to absorb AI costs better than peers. Its in-house TPUs, AI models, and co-design of hardware and software enable it to lower its total cost of ownership. As such, we view the cost-led bear argument against Alphabet to be manageable.

Bears say: Search sales decelerated from 17% to 12%, this may signal search advertising in trouble. We believe that the deceleration will remain gradual, allowing Alphabet to maneuver its business and drive the majority of sales from nonsearch businesses within five years.

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