Cash is king

The gap between profit margins and free cash flow is increasingly linked to AI capex.

Large technology companies are investing heavily in infrastructure—data centers, chips, and energy—to support AI. This is starting to show in the numbers: earnings remain strong, but free cash flow is under pressure as cash is reinvested.

In that sense, parts of the tech sector are becoming more capital-intensive again, moving away from the purely asset-light model of the past.

This helps explain the chart. Profit margins reflect strong demand, while free cash flow lags due to the scale of ongoing investment.

The key question is returns on capital. If these investments deliver, the gap will close from the top. If not, it will close from the bottom.

Cash, as always, will decide.