The latest earnings from Amazon, Microsoft, Alphabet and Meta are the clearest proof yet that artificial intelligence (AI) is having a material, positive impact on these businesses. Demand is translating into faster cloud growth, stronger existing products and, in some cases, meaningful margin improvements.
But the stakes have risen, too.
These companies are committing extraordinary sums to infrastructure, and investors increasingly want proof that the returns will justify the bill. The next phase of the AI story won’t be about who can spend the most. It’ll be about who can turn that investment into durable growth, profit and eventually cash.
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Cloud growth accelerates on AI demand
The standout feature of this earnings season was the acceleration across all three major cloud platforms.
Amazon’s AWS delivered its fastest growth in around 18 quarters, Microsoft’s Azure accelerated and guided to another step-up, and Google Cloud grew at a blistering pace.
This wasn’t growth confined to a few AI specialists, either. Backlogs expanded, and management commentary pointed to demand broadening across established businesses, start-ups and conventional cloud workloads.
Amazon arguably delivered the biggest change in direction.
AWS had spent several quarters improving steadily, but this was a clear turning point. Its AI revenue run-rate climbed sharply, custom chips continued to gain traction, and AWS added more cloud revenue dollars than its major peers. The cloud business is now growing fast enough to reshape Amazon’s overall revenue mix and lift its long-term margin potential.
Microsoft offered the cleanest combination of growth and visibility. Azure’s acceleration was supported by faster deployment of new infrastructure, improved use of its chip (CPU and GPU) fleet, and immediate demand for the capacity brought online.
Google Cloud, meanwhile, overtook Search as Alphabet’s largest source of incremental revenue growth, underlining how quickly the company is evolving beyond its advertising roots.
The message is clear – AI isn’t simply redistributing existing cloud spending. It’s expanding the market while also driving demand for storage, databases, security, and traditional computing.
AI spending puts free cash flow under pressure
Amazon and Alphabet both posted negative free cash flow, a striking outcome for two of the world’s largest cash-generating businesses. Microsoft and Meta are investing heavily, too, meaning that c x free cash flow across the group is likely to stay under pressure even as revenue and operating cash flow continue to grow.
That combination is important. Cash generation from the underlying businesses isn’t weakening. Instead, more of it is being redirected into data centres, chips and power infrastructure. When compute is a competitive advantage, we remain supportive of these investment plans.
Amazon’s CEO and CFO also provided one of the clearest explanations yet of how this funding cycle could evolve. This is something we think the market has been waiting to hear.
The first stage is weighted towards land, power and data-centre buildings, which require large upfront investment but take time to generate revenue. Once those sites are ready, spending shifts towards servers that can be installed and monetised much faster. Amazon indicated that server investments were currently seeing payback periods of roughly two to three years against customer contracts lasting five to six years.
That roadmap also revealed an important degree of flexibility. Buildings and power commitments are long dated, but the pace of later server purchases can be adjusted more readily if demand changes. Investors underwriting a future of ever-rising capital expenditure with no off-ramp may need to reassess.
How is AI reshaping profit margins
AI is reshaping margins in different ways.
Microsoft’s growing cloud mix is likely to dilute gross margins because infrastructure is less profitable than traditional software. But tight control of wider operating costs means that the overall profit pool can still expand, and we’re seeing that with improving operating margins.
Amazon is benefiting from the opposite mix effect.
AWS and advertising are becoming larger parts of the group, shifting the business towards more profitable services. The result was strong operating leverage in the quarter, with profit growth comfortably outpacing revenue even after adjusting for one-off benefits.
Alphabet also balanced rapid investment with expanding adjusted operating margins. Google Cloud is becoming both larger and more profitable, although greater use of third-party computing capacity could pressure cloud margins as Alphabet races to meet demand.
Meta faces the clearest near-term squeeze. Its advertising engine remains strong, but higher infrastructure depreciation and sharply elevated R&D costs are absorbing more of that growth.
The key is to look beyond a single margin figure. Microsoft can generate higher absolute profit with a lower gross margin, and Amazon can improve group margins through a better revenue mix. The real test is whether revenue and gross profit from new AI capacity can grow faster than the depreciation and operating costs that follow. For now, we remain of the opinion that they can.
Is AI growing cloud, advertising and software revenues
AI monetisation doesn’t depend entirely on creating new products. It’s already improving the cloud, advertising, search, and software franchises that generate today’s profits.
Meta’s recommendation and advertising tools are improving engagement and campaign performance, and Alphabet’s Search business continued to grow despite fears that generative AI could undermine it. Microsoft is gaining real traction with Copilot, and Amazon is integrating AI and robotics across its advertising and e-commerce businesses.
These companies don’t need to build an audience from scratch. They already own relationships with billions of consumers and millions of businesses, giving them a key distribution advantage.
What is the market missing?
Amazon
Investors risk focusing on weaker free cash flow while missing the deeper change in the revenue mix. AWS and advertising are making Amazon structurally more profitable, and earnings power could be accelerating faster than the valuation implies, although there are no guarantees.
Alphabet
Investors still largely view Alphabet through the lens of Search, but Cloud has become its biggest source of incremental growth. This is a business being rebuilt around full-stack AI infrastructure – the negative reaction to recent results suggests that the market is yet to adapt to that reality.
Microsoft
The concern is that unprecedented investment destroys the cash flow and margin profile that made Microsoft so attractive. The opportunity is that operating profit continues to accelerate, supported by an enterprise software engine capable of funding the build better than almost any rival.
Meta
The market appears to be pricing in a significant failure to earn returns on the AI programme, even as the core advertising franchise continues to grow at an exceptional rate. It offers the widest gap between current operating strength and investor confidence but also the greatest uncertainty over how and when the wider AI investment pays off.
What this tells investors
We think that AI has passed its first major earnings test. Demand is real, the revenue impact is emerging, and the largest platforms have powerful existing businesses to fund the transition. The harder test starts now – turning a historic investment boom into lasting returns for shareholders.
The author holds shares in Amazon, Meta, and Microsoft.
This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by LSEG. These estimates are not a reliable indicator of future performance. Past performance is not a guide to the future. Investments rise and fall in value so investors could make a loss. Yields are variable and not guaranteed.
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