Top VC Warns: “Depreciation Is Going to Start Hitting” Microsoft, Google and Meta. Here’s Where Things Get Ugly
Alphabet, Meta, and Microsoft face depreciation impacts from AI capex spending, with Meta most exposed. Alphabet's Q3 free cash flow was negative $9.1B, Meta's depreciation rose 44%, and Microsoft's free cash flow slipped. Analysts expect Alphabet's EPS to dip in 2027. Cloud growth at Microsoft and Alphabet may offset depreciation costs, while Meta lacks this advantage.
How this was made
The 30-second read
Why it matters
It frames 2027 as the year margins come down, citing company-specific depreciation trends and contrasting Meta’s lack of a cloud monetization offset with Microsoft and Alphabet’s cloud growth.
Market read
Traders may reprice 2027 margin risk for mega-cap AI spenders, with Meta the most exposed per the article’s framework.
What to watch
Headcount actions (buyouts) and operating expense discipline could offset depreciation impacts more than the article’s base-case implies, especially for Microsoft.
Background
The article argues that Big Tech’s AI capex has been funded by cash flow, but depreciation from that spending will increasingly hit operating margins in 2027.
Ticker impact
Alphabet kept 2026 capex guidance at $195B to $205B and CFO said capex will increase significantly in 2027, implying margin pressure from depreciation.
Likely pressure as investors price in 2027 margin headwinds from depreciation, tempered by cloud cash-flow resilience.
The article ties Alphabet’s capex ramp to future depreciation hitting operating margins in 2027, while noting operating income strength and cloud growth.
Meta’s depreciation and amortization rose 44% in Q3, and excluding a legal charge its operating margin fell about 5 points, highlighting worsening cost absorption.
Likely downside bias as the market extrapolates faster depreciation and cost growth into 2027 earnings.
The piece provides company-specific Q3 depreciation growth and margin deterioration (ex-legal charge), plus the thesis that Meta lacks a cloud offset.
Microsoft’s free cash flow slipped to $18.6B in the September quarter, while depreciation and amortization rose to $38.5B in fiscal 2026, with analysts expecting further increases.
Mixed reaction risk, with near-term support from cloud growth but renewed concern as depreciation ramps into 2027.
The article cites both cash-flow softness and rising depreciation, then offsets with Azure growth and a margin guide that assumes depreciation.
Market effects
Reinforces a sector-wide earnings risk from AI capex depreciation timing, potentially shifting valuation focus from revenue growth to margin durability.
Primarily US mega-cap tech sentiment, with read-through to other AI infrastructure spenders.
Global AI infrastructure investment cycle may see similar margin-depreciation concerns across large-cap software and cloud providers.
Counterpoint
Cloud and AI demand could stay ahead of supply long enough that depreciation becomes a slower-than-feared drag, keeping margins resilient.
Key entities
- companyAlphabet
Capex guidance held at $195B to $205B for 2026, with CFO signaling a significant 2027 capex increase.
- companyMeta Platforms
Q3 depreciation and amortization rose 44%, and ex-legal-charge operating margin fell about 5 points year over year.
- companyMicrosoft
Free cash flow slipped in the September quarter, while depreciation and amortization rose, with Azure growth positioned as an offset.
- personScale Venture Partners' Rory O'Driscoll
VC argues depreciation will start hitting margins in Microsoft, Google, and Meta in 2027.
