Big Tech’s AI Spending Push Shakes Core Businesses; Foreigners Dump $1.17 Billion of Kospi Stocks

Cash Coffers Are Shrinking, Raising Doubts Over How Big Tech Can Keep Pouring In Nearly $1 Trillion

Alphabet Posts $9 Billion Free Cash Flow Deficit

Amazon’s Online Store, Advertising Miss Expectations

Intel’s PC Chip Revenue Falls 5%

Foreign Selling Drives Kospi 3.5% Lower

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Microsoft, Alphabet, Amazon and Meta are projected to spend $740 billion on artificial intelligence capital expenditures this year, roughly 988 trillion won. That is double the level of a year earlier. Through the first half, the four U.S. tech giants funded most of that investment with their own cash. For Alphabet, search advertising served as the key source of funds. For Amazon, e-commerce and advertising played that role. Third-quarter earnings stirred concern that those funding sources could weaken. Confidence in the durability of the AI investment cycle wavered, sending the Kospi down 3.5% on October 30. Foreign investors, who had been net buyers for three straight sessions, dumped 1.621 trillion won ($1.17 billion) of shares on the benchmark market that day.

◇ Could the Funding for Heavy Investment Dry Up

The slump in technology stocks accelerated after Alphabet, Google’s parent, reported earnings on October 28. Third-quarter revenue from search and YouTube advertising missed consensus estimates, while its free cash flow deficit topped $9 billion. That was larger than the market had expected. In other words, the company spent more cash than it generated from business operations. Google search growth slowed to 12% in the third quarter from 17% in the second, missing even the lowered market expectation of 13.5%.

Revenue from AI cloud services doubled from the previous quarter and beat estimates. Alphabet said the pressure on cash flow reflected a short-term impact from fulfilling orders for its in-house AI chips, known as tensor processing units, or TPUs. The market response was cold. Alphabet shares plunged 13% that day, erasing $500 billion in market value in a single session. JPMorgan wrote that the results showed markets will not tolerate weak performance in a core business when a hyperscaler is spending heavily and free cash flow has turned negative.

◇ Amazon’s Free Cash Flow Deficit Widens Sharply

Amazon shares dropped 7.3% in after-hours trading after the company reported third-quarter results the same day. Revenue at Amazon Web Services rose 39%, the fastest growth in five years. But revenue from its online store and advertising business missed market expectations. Its fourth-quarter revenue guidance of about $240 billion, which includes the year-end holiday shopping season, was also about 2% below investor forecasts. Free cash flow added to investor anxiety. The deficit widened to negative $42.4 billion from negative $7.6 billion in the previous quarter, a 5.5-fold increase.

Intel, which has been stepping up its push into AI semiconductors, was held back by its PC business. Revenue from server chips rose 17% from the previous quarter and 78% from a year earlier, marking the strongest quarter-on-quarter growth in 15 years. Revenue from PC chips, however, fell 5% from a year earlier. Its fourth-quarter outlook also fell well short of expectations, with projected revenue of $15.5 billion and earnings per share of 25 cents, versus market estimates of $17.1 billion and 43 cents. Chief Financial Officer David Zinsner said the PC market slowdown will continue through the first half of next year.

◇ Demand for Safe Assets Strengthens

Concern over the cost of investment, which has recently fueled a selloff in global technology shares beginning with CoreWeave, has now spread to Big Tech. Asian stock markets with heavy exposure to AI chips and infrastructure, including South Korea, Japan, Taiwan and China, all fell sharply. Han Ji-young, an analyst at Kiwoom Securities, said solid AI demand has been confirmed, but investors should brace for greater volatility as markets absorb both positive and negative factors, including concern over investment profitability and softer end demand.

Caution ahead of next week’s U.S. midterm elections also intensified risk aversion. The yield on 10-year U.S. Treasuries, regarded as a safe-haven asset, fell 0.06 percentage point to the 4.92% range on October 30. Rotation into defensive sectors also gained traction in South Korean and U.S. stock markets, lifting bio and healthcare, consumer staples and real-estate shares.

Hwang Jung-soo, New York correspondent, Korea Economic Daily, hjs@hankyung.com

Bin Nan-sae, reporter, Korea Economic Daily, binthere@hankyung.com