Free cash flow explained, and why AI spending is eating it

Every big tech earnings release this month came with the same question underneath it: how much cash is left after the AI build-out? The number that answers it is free cash flow. It's simple to calculate, easy to misread, and it just turned negative at Alphabet.

This explainer covers what free cash flow is, why companies define it differently, and how to read it using the quarter ended Sep 30, 2026. If you want the bigger "is this a bubble" checklist, see five numbers to check instead of guessing. Here we stick to the one line.

The formula

Free cash flow (FCF) is:

Operating cash flow − capital expenditures = free cash flow

• Operating cash flow is the cash the business brought in from running itself: customer payments minus suppliers, salaries, taxes and so on. It's the line called "net cash provided by operating activities" at the top of the cash flow statement.
• Capital expenditures (capex) are what the company paid for long-lived assets: land, buildings, servers, chips, networking gear. In the cash flow statement it usually appears as "purchases of property and equipment" in the investing section.

What's left is cash the company can use for anything else: dividends, buybacks, paying down debt, acquisitions or simply saving it. When capex is larger than operating cash flow, FCF goes negative and that gap has to be covered by cash on hand, borrowing or issuing shares.

If you've never opened a quarterly filing, our guide to reading a 10-Q shows where the cash flow statement sits.

Why FCF and profit can point in opposite directions

Net income and FCF treat a new data centre very differently. Accounting profit spreads the cost of a server over its useful life through depreciation, a few years for chips and much longer for buildings. FCF counts the full cash payment in the quarter it goes out the door.

So when a company suddenly doubles its spending on equipment, profit barely notices at first, while FCF takes the whole hit at once. That's why a company can post strong earnings per share (see EPS, beats and guidance, explained) and negative free cash flow in the same release.

FCF isn't a standard number

Free cash flow is a non-GAAP measure. No accounting rule defines it, so each company states its own definition in its release. The differences are small in words and can be large in dollars:

Two traps follow from this. First, comparing one company's FCF with another's without checking definitions. Second, leases: when a company rents data centre capacity under a finance lease, the asset may not show up as cash capex at all, even though it's a long-term commitment.

Alphabet, quarter ended Sep 30, 2026

From Alphabet's Oct 28, 2026 release:

• Operating cash flow: $42.3B
• Purchases of property and equipment: $51.4B, up from $24.0B a year earlier
• Free cash flow: negative $9.1B, after negative $5.9B in the June 2026 quarter
• Trailing twelve-month FCF: still positive at $19.7B

A year earlier, the same quarter produced $48.4B of operating cash flow against $24.0B of capex, or about $24.5B of FCF (our math from the same release). Operating cash flow fell, capex more than doubled, and FCF swung by roughly $33.5B.

The financing section shows how the gap was covered in the quarter: Alphabet made no share repurchases (it spent $11.5B on them a year earlier), raised $29.0B of debt net of costs while repaying $3.6B, and took in $12.4B from selling new shares through its at-the-market program ($4.3B of Class A and $8.1B of Class C).

Microsoft, quarter ended Sep 30, 2026 (fiscal Q1 2027)

From Microsoft's 10-Q, filed Oct 28, 2026:

• Net cash from operations: $58.0B, up from $45.1B
• Additions to property and equipment: $39.4B, up from $19.4B
• Free cash flow: $18.6B, which CFO Amy Hood confirmed on the earnings call. A year earlier it was about $25.7B by the same math, so FCF fell about 27%.

Microsoft is the clearest example of why "capex" needs a definition. On the call, Hood said capital expenditures were $45.2B, including $7.4B of finance leases, and that Microsoft recognizes "the full principal value of finance leases" in capex when the lease starts. Cash paid for property and equipment was $39.4B, and that cash figure is what drives FCF.

She also said Microsoft expects "to continue to remain free cash flow positive in FY '27", the fiscal year that ends in June 2027, while it may "access additional sources of funding" when attractive. That's company guidance, not a result. Our Microsoft and Alphabet recap covers the rest of both reports.

Amazon, quarter ended Sep 30, 2026

Amazon reports FCF on a trailing twelve-month (TTM) basis. From its Oct 29, 2026 release:

• TTM operating cash flow: $168.3B
• TTM purchases of property and equipment, net of proceeds and incentives: $210.7B
• TTM free cash flow: an outflow of $42.4B, compared with an inflow of $14.8B for the twelve months to Sep 30, 2025, and an outflow of $7.6B for the twelve months to Jun 30, 2026

Amazon attributes the drop "primarily" to a $94.8B year-over-year increase in net equipment purchases and says the increase "primarily reflects investments in artificial intelligence". Looking at the single quarter, operating cash flow was $42.4B against $77.3B of purchases and $1.4B of proceeds and incentives, or about $33.5B short (our math). Amazon says it still expects 2026 cash capex of about $220B. Our Amazon Q3 recap has the segment detail.

How to read FCF in the next report

1. Find the company's own definition. It's in the non-GAAP section of the release. Check whether it uses quarterly or TTM figures and how it treats leases.
2. Split the change in two. Did operating cash flow fall, or did capex rise? For all three companies above, the bigger move was capex.
3. Check the financing section. Negative FCF has to be funded. Look for new debt, share sales and paused buybacks.
4. Compare capex with guidance. If a company says capex will keep rising (Amazon's ~$220B for 2026, Microsoft's expectation that spending accelerates in the second half of its fiscal year), FCF pressure probably doesn't end next quarter.
5. Look at the trend, not one print. One negative quarter tells you less than four quarters in a row moving the same way.

Free cash flow won't tell you whether the AI build-out will pay off. It tells you who is paying for it right now, and from which pocket.