Alphabet and Tesla test investors’ patience as AI spending clouds growth

when alphabet and tesla Tech earnings season kicked off Wednesday, but one theme quickly became clear. That means spending on AI is under the microscope.

Both companies reported negative free cash flow for the latest quarter and urged investors to prepare for increased capital spending. Both companies reported better-than-expected sales, but it wasn’t enough to prevent post-market declines, with Tesla shares down 4% and Alphabet shares down more than 3%.

This is a potentially ominous sign for the tech industry, especially other megacap stocks scheduled to report quarterly results next week. meta and microsoft A report is expected next Wednesday, and the following day. Amazon and apple.

Much of the AI ​​boom to date has been fueled by historic levels of infrastructure spending by a small number of companies, including huge investments in model developers OpenAI and Anthropic. But the recent emergence of cheaper open source models, primarily from China, and signs that U.S. companies are becoming more frugal with their spending on AI services have raised concerns about future returns on investment.

Heading into Wednesday’s report, Alphabet stock was already on pace for a third consecutive month of decline after surging in April, while Tesla stock was down 11% in July and 17% for the year. The tech-heavy Nasdaq has fallen about 5% since hitting a record high in early June.

Alphabet and Tesla are both spending at unprecedented levels, but the numbers are very different.

Google’s parent company predicted capital spending of $195 billion to $205 billion this year, and warned that the number would rise even higher in 2027. Previous guidance called for spending between $180 billion and $190 billion. At the higher end of the new range, Alphabet could be the biggest spender in tech this year, as Amazon’s latest guidance was more than $200 billion, but that number could rise even more when the company reports its results next week.

Google and its hyperscaler peers are building data centers packed with advanced chips to provide the computing power needed to build and run advanced AI models and the services that support them.

Mizuho analysts said in a note that Google’s increase in capital spending was “widely expected” and that the overall story is positive, driven largely by a surge in cloud revenue, which grew 82% year-over-year and exceeded previous expectations. Cloud margins have expanded, accelerating the use of Google’s Gemini model.

“As such, we are surprised to see the stock’s price decline in after-hours trading and expect it to recover in tomorrow’s trading,” the analysts wrote, recommending the stock to buy.

Tesla reiterated that it expects capital spending to be more than $25 billion this year, representing about 200% growth from last year. Capital spending in the second quarter 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 refurbishing factory equipment to manufacture the two-seater driverless CyberCab and the humanoid robot Optimus currently under development, and is also preparing to begin construction of a vast AI chip manufacturing factory in Texas.

“Capital investment should be spent as quickly as possible and to the extent that it will not go to waste,” Musk said at an earnings conference. “If you get things done quickly, it doesn’t matter if you lose some capital efficiency,” he added.

For both companies, aggressive growth plans are taking a toll on their cash holdings.

Tesla’s free cash flow turned negative with a $1.1 billion loss in the quarter, after generating free cash flow of $146 million a year ago and $1.44 billion in the first quarter of 2026.

“This is a year of huge capital investment, but I’m confident that everything we’re investing in will deliver incredible returns,” Musk said. He compared Tesla’s spending and construction “in many different areas at the same time” to that of Henry Ford, who developed the Model T.

“I think this is probably the fastest industrial expansion in the United States since World War II,” Musk said.

Alphabet’s numbers are even grimmer, with free cash flow dropping to negative $5.9 billion after the company, which is praised for its high margins from online advertising, generated about $25 billion in free cash flow a year ago.

“We expect free cash flow to remain under pressure due to our investments in technology infrastructure, which allows us to take advantage of the AI ​​opportunity and continue to generate attractive returns,” Chief Financial Officer Anat Ashkenazi said on the earnings call.

Most of the company’s $44.9 billion in capital spending in the second quarter went to infrastructure to support building AI, Ashkenazi said.

In addition to building its own data centers, Google executives said they also plan to rely on capacity from third-party cloud providers to meet frenetic computing demand, building on a recent computing deal with Musk. space xcurrently owns xAI and its Memphis data center.

Wednesday’s results did nothing to dampen the enthusiasm of bullish analysts and investors.

Keith Fitzgerald, principal at investment consulting firm Fitzgerald Group, said Tesla, like Amazon and other companies, is “sacrificing profitability for infrastructure.” Netflix.

“We expect this work to pay off significantly over the next 12 to 24 months, and possibly 36 months,” Fitzgerald said in a note after the report.

Rebecca Wetteman, CEO of technology research firm Valoir, also said in an email that Google’s core business remains strong and its investments in AI are paying dividends.

“Google’s momentum should allay some of the market’s concerns about AI overspending,” she wrote. “The strong performance across the company’s businesses shows that search is not dead, advertising remains important and investing in the cloud remains a viable option.”

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