AI Investment Costs Weigh on Alphabet and Tesla Amidst Growth Scrutiny

(L-R) Google CEO Sundar Pichai speaks and Tesla and SpaceX CEO Elon Musk arrive for the inauguration ceremony before Donald Trump is sworn in as the 47th US President in the US Capitol Rotunda in Washington, DC, on Jan. 20, 2025.

Saul Loeb | Via Reuters

As Alphabet and Tesla kicked off the tech earnings season on Wednesday, one theme emerged prominently: investors are closely scrutinizing AI-related spending.

Both companies reported negative free cash flow for the most recent quarter and signaled to investors that they should prepare for increased capital expenditures. Despite reporting revenue that exceeded expectations, the news failed to prevent an after-market selloff, with Tesla shares dropping 4% and Alphabet falling more than 3%.

This trend could serve as an ominous signal for the broader tech sector, particularly for other megacap companies scheduled to report quarterly results next week. Meta and Microsoft are slated to report next Wednesday, followed a day later by Amazon and Apple.

The current AI boom has been largely sustained by historic infrastructure spending from a small group of companies, including significant investments in model developers such as OpenAI and Anthropic. However, the rise of inexpensive open-source models, primarily originating from China, combined with indications that American corporations are becoming more cautious with AI service spending, has fueled concerns regarding future returns on investment.

Leading into Wednesday’s reports, Alphabet’s stock was already trending toward its third consecutive monthly decline following a surge in April, while Tesla shares saw an 11% drop in July and a 17% decline for the year. The Nasdaq, which is heavily weighted toward tech, has fallen approximately 5% since its record high in early June.

While both Alphabet and Tesla are undertaking unprecedented spending, their financial profiles differ significantly.

Google’s parent company has forecasted annual capital expenditures between $195 billion and $205 billion, warning of even higher costs in 2027. This is an increase from previous guidance of $180 billion to $190 billion. At the upper limit of this new range, Alphabet could become the largest technology spender this year, potentially surpassing Amazon’s latest guidance of over $200 billion, a figure that may rise following next week’s earnings report.

Google and its cloud competitors are rapidly expanding data center capacity with advanced chips to provide the necessary computing power for leading AI models and their associated services.

Mizuho analysts noted that Google’s increased capital expenditure was “broadly anticipated” and suggested the overall outlook remains positive, driven by a surge in cloud revenue, which grew 82% year-over-year, surpassing estimates. Cloud margins expanded alongside accelerating usage of Google’s Gemini model.

“As such we are surprised the stock is trading off after hours and would expect it to recover in trading tomorrow,” the analysts wrote, maintaining a buy recommendation.

‘As fast as we can spend’

Tesla reiterated its expectation for more than $25 billion in capital expenditures this year, representing approximately 200% year-over-year growth. In the second quarter, capital expenditures jumped 142% to $5.79 billion as the company ramps up spending on self-driving technology, AI, and robotics initiatives—areas CEO Elon Musk has emphasized for years.

Tesla is currently retooling its facilities to produce the driverless Cybercab and the Optimus humanoid robot, while also preparing to begin construction on a major AI chip-manufacturing plant in Texas.

“We should be spending on capex as fast as we can spend, as fast as we can without it being too wasteful,” Musk stated during the earnings call. He added, “It’s ok to be a little less capital efficient if we get things done sooner.”

For both firms, these aggressive expansion plans are significantly impacting cash reserves.

Tesla’s free cash flow turned negative this quarter, reaching a deficit of $1.1 billion, compared to a surplus of $146 million a year ago and $1.44 billion in the first quarter of 2026.

“This is a massive capex year but we are confident that all the things that we are investing in will yield incredible returns,” Musk said, comparing Tesla’s simultaneous multi-sector expansion to Henry Ford’s development of the Model T.

“I think probably this is the fastest industrial scale-up since World War II in America,” Musk remarked.

The data for Alphabet was even more pronounced, with free cash flow falling to negative $5.9 billion, a stark contrast to the nearly $25 billion in free cash flow the company generated a year ago.

“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,” CFO Anat Ashkenazi explained.

Ashkenazi noted that most of the company’s $44.9 billion in second-quarter capital expenditure was directed toward infrastructure to support the AI buildout.

In addition to constructing its own data centers, Google executives indicated they plan to leverage capacity from third-party cloud providers to meet high computing demands, building on a recent computing agreement with Elon Musk’s SpaceX, which owns xAI and its Memphis data centers.

Despite the market reaction, the recent results have not dampened the optimism of many analysts and investors.

Keith Fitz-Gerald, principal at Fitz-Gerald Group, observed that Tesla is sacrificing profitability for infrastructure, a strategy previously employed by companies like Amazon and Netflix.

“I expect it to pay off in spades over the next 12-24, even 36 months,” Fitz-Gerald noted.

Similarly, Rebecca Wettemann, CEO of Valoir, stated that Google’s core business remains robust and that its AI investments are delivering returns.

“Google’s momentum should calm some market fears about AI overspending,” Wettemann wrote. “Strong performance across its businesses show search isn’t dead, advertising still matters, and cloud investment is still a good bet.”

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