Sundar Pichai's Alphabet slid after hours on negative cash flow while Satya Nadella's Microsoft rose on 48% Azure growth

For weeks the AI trade has been asking one question of the biggest spenders: when does the money come back? On Wednesday evening, Alphabet and Microsoft answered within minutes of each other, and investors handed them opposite verdicts.

Alphabet shares fell between 7% and 8% in extended trading, according to CNBC, Ctech and onvista. Microsoft rose as much as 4% after hours, CNBC reported, a move that onvista said would put the stock at a record. In the regular session, Alphabet had closed up 1.34% at $324.89 and Microsoft had slipped 0.06% to $531.01, according to Yahoo Finance data.

Alphabet: fast growth, missing cash

Alphabet's revenue grew 25% from a year earlier to $127.58 billion, the fastest growth rate for any period since 2021, CNBC reported. That still fell short of the $128.22 billion analysts polled by LSEG had expected. Adjusted earnings of $2.67 a share missed the $3.02 estimate, and net income fell to $26.17 billion, or $2.12 a share, from $34.98 billion, or $2.87 a share, a year earlier.

The number that drew the most attention was cash. Alphabet reported negative free cash flow of $9.07 billion, far worse than the $2.70 billion shortfall analysts had expected, according to CNBC. Capital expenditures totaled $51.36 billion, below the $55.09 billion Wall Street had projected. Alphabet has guided to full-year capital spending of $195 billion to $205 billion and expects more than $300 billion in 2027, CNBC said.

Another drag came from the company's investment portfolio. Equity holdings, which included stakes in SpaceX and Anthropic, produced a $99.03 billion gain in the second quarter but swung to a loss of $8.66 billion in the third, CNBC reported. Operating income of $40.58 billion missed a FactSet forecast of $43.19 billion.

Search, the core business, also came in light. Ctech reported search revenue of $63.35 billion against expectations of $64.96 billion.

"Our AI investments are driving overall Search query growth, including commercial queries. In fact, our year-over-year query growth rate is the highest it's been in the last five years." - Sundar Pichai, Alphabet CEO, in the earnings statement, as quoted by The Verge

There were bright spots. Google Cloud revenue rose 103% to $30.7 billion, ahead of the $28.7 billion analysts expected, CNBC and The Verge reported. The Gemini app passed 1 billion users, which Ctech said makes it the fastest-growing product in the company's history.

Microsoft: Azure beats, spending comes in lower

Microsoft's fiscal first quarter, which ended Sept. 30, showed the opposite mix. Revenue rose 19% to $92.28 billion, above the $90.69 billion LSEG consensus, and adjusted earnings of $4.89 a share topped the $4.73 estimate, CNBC reported.

For the first time, Microsoft gave Azure revenue in dollars: $33.17 billion, up 48% and above the $32.32 billion StreetAccount estimate, according to CNBC. Azure growth was 42% in the June quarter. The broader Microsoft Cloud business brought in $63.9 billion, up 31% in constant currency, Investing.com reported.

Spending was the other surprise. Capital expenditures including finance leases were $45.2 billion, up about 30% from a year earlier but well under the $50.67 billion StreetAccount projection, CNBC said. About 75% of that spending now goes to short-lived assets such as chips, up from about half a year ago. Free cash flow fell 27% to $18.63 billion but stayed positive.

"Azure revenues are up more than expected and capex was significantly lower than expected. That led to an EPS beat." - Steve Sosnick, chief strategist at Interactive Brokers, to Investing.com

CEO Satya Nadella said in the statement that Microsoft is "translating our innovation into growing adoption and real-world impact across every industry."

Why the split matters

Both companies are pouring money into data centers. The difference on Wednesday was how much cash was left over. Microsoft kept free cash flow positive, while Alphabet joined Meta, which said last week that its cash flow had turned negative for the first time, according to CNBC.

Options markets had priced a bigger move in Alphabet than in Microsoft, CNBC reported earlier in the day, with Cboe LiveVol data implying a 5.8% swing for Alphabet and under 5% for Microsoft. Alphabet went into the report about 20% below its May closing high.

Extended-hours prices can change before Thursday's open, when the regular session gives the first full read. Thursday also brings the Fed's preferred inflation gauge and an early estimate of third-quarter GDP.