Alphabet And Tesla Are Betting Hundreds Of Billions On AI. Their Shares Are Plummeting

Wall Street's enthusiasm for artificial intelligence is facing a new reality check after Alphabet and Tesla's AI investments started overshadowing the companies' financial growth as their stock dipped.

Combined with a jittery session for markets, influenced by escalating clashes in the Middle East, Tesla fell more than 13%, while Alphabet lost more than 7% as both companies reported negative free cash flow for this quarter. However, both also reported higher revenue than expected. Investors are also preparing for a critical week of earnings from other technology giants.

Microsoft and Meta Platforms are scheduled to report next Wednesday, followed by Amazon and Apple the following day. All are expected to face similar scrutiny over AI-related investments.

The emergence of lower-cost open-source AI models, particularly from China, along with signs that businesses are becoming more selective in purchasing AI services, has intensified concerns over future profitability.

CNBC detailed that Alphabet significantly raised its capital expenditure outlook for 2026, forecasting between $195 billion and $205 billion in spending, compared with previous guidance of $180 billion to $190 billion. The company also warned investors that spending is expected to increase further in 2027.

At the high end of that range, Alphabet could become the technology industry's largest capital spender this year, potentially surpassing Amazon, which previously projected more than $200 billion in annual capital expenditures but has yet to report updated guidance.

Most of Alphabet's second-quarter capital spending, totaling $44.9 billion, was directed toward expanding technical infrastructure needed to support AI development, according to Chief Financial Officer Anat Ashkenazi. The company continues building massive data centers equipped with advanced chips while also supplementing computing capacity through third-party cloud providers.

Ashkenazi acknowledged that the spending surge would continue weighing on cash generation. "We expect the free cash flow will remain under pressure, driven by our investments in technical infrastructure, which enables us to capitalize on the AI opportunity and continue to drive attractive returns," she told investors during the earnings call.

Alphabet's free cash flow swung dramatically into negative territory, falling to negative $5.9 billion after generating nearly $25 billion during the same quarter a year earlier.
Still, the company's underlying business remained robust.

Google Cloud revenue surged 82% year over year, significantly exceeding analyst expectations, while cloud profit margins improved and adoption of Google's Gemini AI platform continued to accelerate.

Tesla is pursuing a similarly aggressive investment strategy, though with a different focus. The electric vehicle maker reaffirmed plans to spend more than $25 billion on capital expenditures this year, representing roughly 200% year-over-year growth.

Second-quarter capital spending climbed 142% to $5.79 billion as the company accelerated investments in autonomous driving technology, artificial intelligence, robotics and manufacturing expansion.

Tesla is also retooling factories to produce its driverless Cybercab, scaling production of its Optimus humanoid robot and preparing to build a major AI chip manufacturing facility in Texas.

Chief Executive Elon Musk defended the company's rapid spending pace, saying speed matters more than maximizing short-term efficiency. "We should be spending on capex as fast as we can spend, as fast as we can without it being too wasteful," Musk said during the earnings call. "It's ok to be a little less capital efficient if we get things done sooner."

The investments pushed Tesla's free cash flow to negative $1.1 billion during the quarter, compared with positive free cash flow of $146 million a year earlier and $1.44 billion in the first quarter.

Musk argued that the company is building multiple transformational businesses simultaneously and compared Tesla's expansion to Henry Ford's industrial revolution around the Model T. "This is a massive capex year but we are confident that all the things that we are investing in will yield incredible returns," he said.