AI capex shifts Wall Street focus from EPS to cash flow
AI-driven capital spending is pushing investors to prioritize free cash flow over EPS, reshaping earnings season.
The artificial intelligence boom is changing how investors evaluate corporate performance, with attention shifting from earnings per share (EPS) to free cash flow (FCF). This marks a notable departure from Wall Street's long-standing fixation on EPS, a metric critics say is vulnerable to accounting discretion.
EPS can be influenced by management through choices in depreciation schedules and other accounting treatments, often allowing companies to meet or slightly beat guidance. Free cash flow, which adjusts for capital expenditures and non-cash charges, is considered harder to manipulate.
Alphabet's second-quarter results illustrate the shift. Despite reporting a quadrupling of earnings and an EPS beat, the company's stock fell 7% after it disclosed negative free cash flow for the first time as a public company. The decline was driven by a capital expenditure binge of $44.92 billion, which exceeded consensus estimates.
Investors are now scrutinizing depreciation practices more closely. Several major tech firms have extended the assumed useful lives of servers and networking equipment, reducing annual depreciation charges. Alphabet moved from four to six years in 2023, while Microsoft and Meta made similar adjustments. Amazon Web Services extended server lives from five to six years in 2024, then reverted some assets to five years in 2025.
Accounting expert Baruch Lev has described such depreciation schedules as "totally arbitrary," suggesting companies may be using them to manage reported results.
Even capital expenditure guidance can be influenced by accounting choices. Microsoft's shares rose in late July after it projected lower capex for the first quarter of 2027. The reduction, however, stemmed from a change in how it accounts for leases, spreading costs over 25 years instead of 15.
The episode serves as a reminder that while the focus on cash flow is a positive development, investors should remain vigilant about the assumptions underlying reported figures.