AI Infrastructure Boom Strains Cloud Giants' Cash Flows, Julius Baer Warns

The world's largest cloud companies are at the center of the artificial intelligence revolution, but hidden behind the massive investments in AI infrastructure are financial risks. According to a review by Afonso Borges from Julius Baer's fixed income research department, while cloud companies share the same growth story, there are significant differences between them in risk levels and their ability to fund expansion.

Not all cloud companies carry the same level of risk. At first glance, major cloud providers look like a uniform group, all pouring massive sums into expanding data centers and developing AI infrastructure. However, a look at the bond market shows that investors do not treat them all the same.

According to the review, long-term corporate bonds maturing in about 30 years trade at yield spreads of 60 to 275 basis points above US Treasury bonds of comparable duration. This yield spread reflects, among other things, the risk premium investors demand to hold corporate debt over government bonds.

Technology giant Microsoft sits at the lower end of this spread range, while Oracle bonds trade at the highest spreads exceeding 200 basis points, followed by SpaceX. Amazon, Alphabet, and Meta fall between these extremes. These gaps illustrate why it is incorrect to lump all cloud companies into a single investment basket.

Investments and debt growing faster than cash flow. Financial data for the second quarter of 2026 illustrates the magnitude of this shift. For Amazon, Alphabet, Meta, Microsoft, and Oracle, capital expenditures—investments in assets and infrastructure, including data centers—surged by 81% compared to the same quarter last year.

Simultaneously, total debt grew by 92%. Operating profit before depreciation and amortization (EBITDA) also rose by 24%, but its growth rate significantly lagged behind investment growth. Consequently, the combined free cash flow of the five companies dropped by 38%, while their interest expenses jumped 60% due to increased reliance on debt financing. This means that even companies exhibiting robust business growth and significant profitability may face financial pressure as investments expand faster than available cash.

Data looks strong, but the picture is uneven. Despite surging investments and debt, the aggregate financial position of the five companies remains solid. At the end of the second quarter of 2026, their gross leverage stood at 0.7 times EBITDA, the EBITDA-to-revenue margin reached 39%, and the interest coverage ratio hit approximately 47 times. By comparison, other investment-grade companies excluding major cloud providers recorded an average leverage of 2.3 times EBITDA, an EBITDA margin of 21%, and an interest coverage ratio of about 11 times. Furthermore, the five cloud giants maintained a collective net cash surplus.

However, the Julius Baer economist emphasizes that aggregate figures can mask essential underlying differences between companies. While some can fund a large portion of their investments through internally generated cash flow, others depend more heavily on debt issuance in the bond market. Initial leverage, exposure to AI investments, and the ability to cut costs or alter shareholder capital return policies also vary significantly.

The next test: funding the AI race. As investments in artificial intelligence infrastructure continue to outpace earnings and cash flow, differentiation between these firms is expected to grow. Companies with a robust financial foundation will likely absorb this accelerated investment cycle better.

Conversely, firms that continue increasing capital expenditures while free cash flow weakens, forcing them into repeated bond issuances, risk rising leverage and declining debt-servicing capacity. Consequently, the bank's core conclusion is that massive AI investments do not render all cloud companies equivalent investments. For bond market investors, evaluating each company individually is essential—particularly assessing its ability to fund growth without overextending debt and cash flow.