October was rough for AI stocks.
Alphabet fell about 19% in the month. Meta fell about 15%. It was not because the businesses suddenly stopped growing. Alphabet revenue was up 25%. Meta revenue was up 26%.
The market hated the spending.
Both companies are spending huge amounts to build AI capacity. That spending has pushed free cash flow down hard, even into negative numbers for the quarter. Their bet is simple. Spend through a weak free cash flow period now, and the future free cash flow will be amazing.
That bet may be right. It may also be wrong. But I keep coming back to an old line from Jeff Bezos in 1997. When forced to choose between making the accounting look pretty and the present value of future cash flows, he said, “we’ll take the cash flows.”
I agree. Free cash flow is the destination.
But while the building spending is front loaded, I am watching a different number. Operating cash flow. That is the cash the core business collects before the building spending. It tells me if the engine still works.
Alphabet operating cash flow is about $180 billion over the last twelve months, and growing. Meta is about $133 billion, and growing. Their free cash flow has collapsed because they are building, not because the engine has stopped.
So is this a bubble?
Parts of it, yes. Some AI names are priced for perfection, with huge multiples and no cash flow to show yet. If anything goes wrong, there is nothing under the price.
But the biggest spenders do not look like the dot com bubble to me. That bubble was built by companies with little revenue and borrowed hope. These are profitable giants funding the buildout from enormous operating cash flow.
Both things can be true. AI can be a real shift, and some AI prices can still be a bubble.
The question is not whether AI is real. The question is who has a cash engine today, and who only has a story about tomorrow.
This is too big for one post. I will do more posts on this topic soon, one layer at a time. The spenders, the chips, the builders, and the software on top. Then I will come back to the bubble question with the whole map in front of us.