Amazon (AMZN 1.52%) and Alphabet (GOOGL 1.66%) (GOOG 1.68%) shocked investors when they announced their AI spending plans for 2026. Alphabet went first, telling investors it would spend between $175 billion and $185 billion this year on capital expenditures. Not to be outdone, Amazon said it would spend about $200 billion this year.
Both companies are investing heavily to keep up with growing demand for compute power among artificial intelligence developers, including their own AI projects. Management teams at each company noted that their cloud computing operations remain supply constrained, further evidenced by their growing contracted backlogs.
But the massive increases in cash spending for both companies will put pressure on a very important metric used to track their financial health. Here's what investors need to know.
Image source: Getty Images.
Cash is king
The big jump in capital expenditures will mean that both tech giants could see free cash flow decline to close to $0, or even go negative, in 2026. That's well-trodden territory for Amazon, which is used to investing huge sums to build out its logistics network. Alphabet, on the other hand, has never produced negative cash flow for a full year since going public.
Alphabet may still avoid negative free cash flow in 2026. It produced $165 billion in operating cash flow in 2025, and that number is growing quickly as it continues to scale its cloud computing business. Its core Google search business has also produced respectable revenue growth. If Alphabet sticks to its budget, it should be able to eke out positive free cash flow for the year.
The company ended the year with $127 billion in cash equivalents and marketable securities on its balance sheet. Still, management has opted to tap the debt market for $32 billion to fund its data center buildout. The company already added $36 billion in long-term debt to its balance sheet in 2025, ending the year with $47 billion total.
NASDAQ: GOOG
Key Data Points
Amazon, meanwhile, is unlikely to avoid going into the red on its free cash flow. Its operating cash flow of $140 billion isn't growing as fast as Alphabet's. It should see a step up next year as it shows strong margin expansion for its retail business and its cloud computing revenue is once again accelerating. Still, it's unlikely to experience the 43% growth in operating cash flow necessary to cover its planned $200 billion in capital expenditures.
Is all this spending really worth it?
Spending as much cash as you're bringing in (or more) isn't a very good strategy if you do it consistently. But both Alphabet and Amazon are very likely to see strong returns on their invested capital that should result in strong operating cash flow growth in the long run.
That starts with their growing backlogs. Alphabet reported a backlog of $240 billion, up 55% sequentially from the third quarter. Management says its contracts represent "a wide breadth of customers, driven by demand for AI products." Amazon's backlog grew a more modest 22% quarter over quarter, reaching $244 billion. Management also suggested there are some significant deals in the pipeline, including a potential tie up with OpenAI.
NASDAQ: AMZN
Key Data Points
As mentioned, both have seen demand grow quickly over the last few years, with supply being the only constraint on their growth. That means they can produce returns relatively quickly on their invested capital.
Alphabet demonstrated that last quarter. It increased capital expenditures for the quarter, up 16% sequentially, and its Google Cloud revenue also accelerated, growing 48% year over year. It also produced operating margin above 30% for the segment for the first time. Amazon likewise increased capex and saw an acceleration in cloud computing revenue. It makes sense to lean into that opportunity.
Nonetheless, the stock market sold off both stocks following their announced spending plans. Patient, long-term investors may have an opportunity to buy shares for a small discount right now as the two companies leverage their balance sheets and steady operating cash flow growth to take advantage of the current opportunity in the market. Few companies are as well-positioned as these two to invest so much in an area with very high potential returns. Both stocks look attractive amid the market's pullback.
