Free cash flow is where the capex bill lands first

Earnings can keep rising through a heavy spending cycle, because the cost of new capacity arrives slowly as depreciation. Free cash flow feels the full bill immediately, and free cash flow is what pays for buybacks, acquisitions and the market's patience.

Two views of the same spending

Earnings spread the cost of a data centre over its useful life. Cash flow takes the hit in the year the money leaves. In a build cycle, the gap between the two widens, and a company can report record profits while generating much less cash than a year earlier.

Investors who value the business on cash flow see a different company from those who value it on earnings.

What I'm watching

• Free cash flow after capital leases
• Capital spending guidance for the coming year
• Depreciation growth, which shows the cost arriving in earnings later

Where I stand

Short, on free cash flow compressing through the build while the shares trade on earnings. The spending may be right; the cash will be scarce while it happens.

What would change my mind

Capital spending levelling off while cloud revenue keeps growing. That is the point where free cash flow recovers quickly, and the compression would already be behind us.