Big Tech loses $900 bln in market value as AI erodes core businesses

The largest U.S. tech companies have lost around $900 billion in market value in a broad selloff, the Financial Times estimates. Shares of the four hyperscalers, Amazon, Meta, Microsoft, and Alphabet, have retreated after their latest quarterly earnings.

The bet on AI has turned some of the most profitable companies in history into businesses rapidly burning through cash, the FT notes. Meanwhile, the tech leaders’ core businesses, including advertising, consumer services, and retail, which fund their AI spending, are beginning to show signs of slowing. In some cases, their revenue is being eroded by the very technology they are betting so heavily on, Bloomberg writes. The four companies’ combined spending on chips and data center infrastructure is approaching a record $740-750 billion this year, on the FT's numbers.

The earnings reports have exposed growing tensions surrounding the tech giants’ shift to AI, Bloomberg writes. To finance a global data center buildout, the companies are issuing unprecedented amounts of debt, selling stock, and taking on trillions of dollars in future obligations. Meanwhile, new products are eroding their profitability and drawing users away from their traditional services. Despite declining margins and investor discontent, the companies are refusing to cut spending, Bloomberg adds.

Alphabet reported this week that advertising revenue from search and partner channels grew at its slowest pace in five quarters. The reason is the integration of AI into its search engine: Chief Business Officer Philipp Schindler acknowledged that queries through the new AI Mode tab generate significantly less advertising revenue than traditional searches. Yet the management maintained its capex guidance of as much as $205 billion this year. The company subsequently suffered its worst day ever in the stock market. Even its cloud business, where quarterly revenue doubled year over year and operating income tripled, failed to stem the selloff.

Amazon’s management also reiterated plans for around $220 billion in capex in 2026 despite weakness in key businesses. Third-quarter online store sales growth slowed to 2%, its lowest rate in more than three years, while advertising revenue growth eased to 11%, the slowest pace since Amazon began reporting advertising separately in 2022. The slowdown partly reflected the shift of Prime Day from the third quarter to the second. Analysts had already factored that in and lowered their expectations, however, and Amazon’s results still fell short of those adjusted forecasts, overshadowing the strength of its cloud business.

Other companies face a similar situation, Bloomberg notes. Meta’s management maintained its spending guidance but spooked investors by warning that its new agentic AI app, Muse, requires enormous computing power. Despite strong quarterly financials and tight spending controls, Microsoft also failed to hold on to its gains: by Thursday’s close, the stock had erased its entire early advance and finished down 0.2%.

The market is “scratching its head – how does all this pay off?” Dan Morgan, senior portfolio manager at Synovus Trust, said following Alphabet’s earnings.

Google has struggled this year to keep up with start-ups Anthropic and OpenAI in the AI race. If it can regain its footing in model development, it will likely resume delivering the returns investors have come to expect, Bloomberg Intelligence analyst Mandeep Singh reckons. “With all these transitions, sometimes we get too fixated on the cash cow business,” Singh said. “Given how Cloud has been expanding margins, I feel a combination of the cloud business and search, once they are at the frontier, would take their profitability back to where they were.”

It is common for new advertising formats to launch with low margins that gradually improve, Gene Munster, managing partner at Deepwater Asset Management, said of Google’s weak AI Mode monetization. The bigger challenge for the industry, in his view, is to build agents that can make purchases on users’ behalf and take a cut of those transactions. The industry is on the verge of a fundamental shift in its advertising model: Companies will have to compete for the attention of algorithms rather than people. “The old way of doing it was blue links or display advertising to influence consumer behavior,” Munster said. “The new way is how do you influence the bot.”