(LR) Sundar Pichai, CEO of Google, speaks and Elon Musk, CEO of Tesla and SpaceX, arrive for the inauguration ceremony before Donald Trump is sworn in as the 47th US President in the Rotunda of the US Capitol on January 20, 2025 in Washington, DC.
Saul Loeb | Via Reuters
When alphabet And Tesla As the company opened its tech earnings season on Wednesday, one theme was immediately clear: AI spending is under the microscope.
Both companies reported negative free cash flow for the most recent quarter, prompting investors to prepare for higher capital spending. Both also reported better-than-expected sales, but that wasn’t enough to prevent a post-market selloff, with Tesla shares down 4% and Alphabet shares down more than 3%.
It’s a potentially ominous sign for the tech industry, particularly for the other mega-corporations, most of which will report quarterly results next week. Meta And Microsoft should report next Wednesday, followed a day later Amazon And Apple.
Much of the AI boom to date has been fueled by historic infrastructure spending by a small group of companies, including heavy investments in model developers OpenAI and Anthropic. But the recent emergence of cheaper open-source models, largely from China, as well as signs that American companies are becoming more frugal in their spending on AI services have raised concerns about future returns on investment.
According to Wednesday’s reports, Alphabet shares were already on track for their third consecutive monthly decline after surging in April, while Tesla shares fell 11% in July and 17% for the year. The tech-heavy Nasdaq has fallen about 5% since its record high in early June.
While both Alphabet and Tesla are making unprecedented spending, their numbers vary dramatically.
Google’s parent company forecast capital spending of $195 billion to $205 billion this year and warned of higher numbers in 2027. It had previously forecast spending of $180 billion to $190 billion. At the high end of the new range, Alphabet could be the biggest tech investor this year, as Amazon’s most recent forecast was for more than $200 billion. However, that number could increase when the company reports its results next week.
Google and its fellow hyperscalers are building data centers equipped with advanced chips so they can provide the computing power needed to build and run the leading AI models and the services they support.
Mizuho analysts wrote in a note that Google’s increase in capital spending was “widely expected” and that the overall picture was positive, largely due to the increase in cloud revenue, which rose 82% year-on-year, beating estimates. Cloud margins expanded and adoption of Google’s Gemini model accelerated.
“Therefore, we are surprised to see the stock slip in after-hours trading and expect it to recover in tomorrow’s trading,” wrote the analysts, who recommend buying the stock.
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“As fast as we can spend.”
Tesla reiterated expectations for more than $25 billion in investments this year, which would represent growth of about 200% from last year. In the second quarter, capital expenditure increased 142% to $5.79 billion. The company increased spending on self-driving technology, AI and robotics initiatives that CEO Elon Musk has touted for years.
Tesla is currently retooling its factories to produce the two-seat driverless Cybercab and the humanoid Optimus robots still in development, while also preparing to begin construction of a sprawling AI chip manufacturing factory in Texas.
“We should be investing as quickly as possible, as quickly as possible without it becoming too wasteful,” Musk said on the earnings call. He added: “It’s OK to be a little less capital efficient if we do things sooner.”
For both companies, aggressive growth plans are putting a significant strain on their cash balances.
Free cash flow at Tesla turned negative in the quarter, with a deficit of $1.1 billion, after the company generated $146 million in free cash flow a year ago and $1.44 billion in the first quarter of 2026.
“This is a huge year of investment, but we are confident that all the things we are investing in will deliver incredible returns,” Musk said. He compared Tesla’s spending and building in “many different areas at the same time” to that of Henry Ford with the Model T.
“I think this is probably the fastest industrial expansion in America since World War II,” Musk said.
At Alphabet, the numbers were even more stark: free cash flow fell to minus $5.9 billion, after the company, praised for its high online advertising margins, generated nearly $25 billion in free cash flow a year ago.
“We expect free cash flow to remain under pressure, driven by our investments in technical infrastructure, which will allow us to capitalize on AI opportunities and continue to generate attractive returns,” CFO Anat Ashkenazi said on the earnings call.
The majority of the company’s $44.9 billion in investments in the second quarter went toward infrastructure to support AI expansion, Ashkenazi said.
In addition to building its own data centers, Google executives say they also want to use third-party cloud capacity to meet feverish computing demand, building on a recent computer deal with Musk SpaceXwhich now owns xAI and its data centers in Memphis.
Wednesday’s results failed to dampen the enthusiasm of optimistic analysts and investors.
Keith Fitz-Gerald, director of investment advisory firm Fitz-Gerald Group, said that at Tesla “infrastructure profitability is being sacrificed,” just as companies like Amazon and have previously done Netflix.
“I expect it to pay off in a big way over the next 12 to 24, even 36 months,” Fitz-Gerald wrote in a note following the report.
And Rebecca Wettemann, CEO of technology research firm Valoir, said in an email that Google’s core business remains strong and that its AI investments are generating returns.
“Google’s momentum should allay some market fears about overspending on AI,” she wrote. “The strong performance across all divisions shows that search is not dead, advertising still matters and cloud investments are still a good choice.”
REGARD: Tesla stock slides due to lack of earnings per share
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