Declining free cash flows are the canary in the coal mine. It’s time to sell most of big tech.
For years, these big tech companies operated in a class all their own: generating billions in Core Earnings, high free cash flow (FCF), strong profit margins, and best-in-class returns on invested capital (ROIC).
Massive AI spend is upending this long-held notion.
The market is staring at an AI future where big tech companies have Industrials-like levels of capex and generate Industrials-like levels of return. In such a scenario, there’s no straight-faced argument for the AI tech giants to retain their current sky-high valuations, even after the pullback already seen this year.
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Everything Looks Fine on the Surface
Because most financial analysis focuses so much on the Income Statement, investors are likely unaware of the deteriorating conditions below the surface. For instance, net operating profit after-tax (NOPAT) margins for five of the six big tech companies in this analysis increased from 2021-2025.
Below the Surface…Looks Bad
As we noted in a prior report, off-balance sheet debt is crushing free cash flow.
FCF margins, which measure how much FCF a company generates per dollar of revenue, are also deteriorating.
Historically, big tech companies generated strong FCF margins. Not anymore.
FCF margin for five of the six companies in this analysis fell substantially between 2021 and 2025. See Figure 2 in the full report.
Balance Sheet Efficiency Deteriorates
The big tech giants are not only generating less FCF per dollar of revenue, but they’re generating less revenue per dollar of invested capital. In other words, balance sheet efficiency is collapsing.
Invested capital turns, a measure of balance sheet efficiency, steadily declined for all six companies from 2021-2025.
Figure 3: AI Spenders’ Invested Capital Turns: 2021-2025
Sources: New Constructs, LLC and company filings
Due to one company’s fiscal year, its data is from November 2021 through November 2025. All other data is from December 2021 through December 2025
There’s No Value Left in the Big Tech AI Trade
Still looking for value in the AI trade? Look elsewhere. With falling cash flows and deteriorating ROICs, all the stocks in this report look very expensive.
Each stock in this report trades well above its economic book value, or no-growth values, which means market expectations imply profits will grow quite substantially from current levels.
At some point, the cash burn and ROIC contraction has to sharply reverse into cash flow generation and greater ROICs for these stocks to maintain current valuations and avoid major declines.
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