Amazon, Alphabet, and Microsoft's AI Spending Binge: Who's Overpaying?

Amazon (NASDAQ:AMZN), Alphabet (NASDAQ:GOOGL), and Microsoft (NASDAQ:MSFT) are leading the AI infrastructure spending race, with combined plans to spend over $590 billion in 2026. This massive investment has led to concerns that a misstep could hit shareholders hard.

Among these three hyperscalers, Amazon is planning to spend approximately $220 billion, followed by Alphabet's guided range of $195 billion to $205 billion, and Microsoft's projected spending of around $175 billion.

The combined total of over $600 billion in AI capital expenditures from just three companies has raised questions about their valuations. Microsoft trades at a premium of 28 times earnings, while Alphabet is valued at 17 times earnings with positive free cash flow intact. Amazon's valuation sits at around 20 times earnings.

Analyst Dan Romanoff from Morningstar believes software firms are the most undervalued they have been in the last three years, and this assessment may apply to Alphabet, which trades at a deeper discount relative to its earnings growth and free cash flow. The market's valuation of Alphabet may reflect mispricing rather than fundamental weakness.

In conclusion, investors should evaluate these companies as distinct risk-reward propositions rather than a single mega-cap basket. A closer look at their valuations reveals that Alphabet offers a margin of safety not present in Microsoft and Amazon.