Alphabet, Tesla test investor patience AI spending overshadows growth

When Alphabet And Tesla’s As we kicked off tech earnings season on Wednesday, one theme immediately became clear: AI spending is under the microscope.

Both companies reported negative free cash flow in the latest quarter and told investors to prepare for higher capital expenditures. Both reported better-than-expected earnings, but that wasn’t enough to prevent an after-market sell-off, with Tesla shares losing 4% and Alphabet losing more than 3%.

This is a potentially ominous sign for the tech industry, especially other mega-cap companies that will mostly report quarterly results next week. Meta And Microsoft They are scheduled to report next Wednesday, with a follow-up a day later. Amazon And Apple.

Much of the AI ​​boom to date has been driven by historic infrastructure spending among a small group of companies, including major investments in model developers OpenAI and Anthropic. But the recent emergence of cheaper open source models largely out of China and signs that corporate America is becoming more frugal in spending on AI services have raised concerns about the future return on investment.

Heading into Wednesday’s reports, Alphabet’s shares were accelerating their third straight monthly decline after a rally in April, while Tesla shares were down 11% in July and 17% for the year. The tech-heavy Nasdaq has fallen nearly 5 percent since hitting a record in early June.

While Alphabet and Tesla are spending at unprecedented levels, their numbers differ significantly.

Google’s parent company predicts capex for this year will be between $195 billion and $205 billion, and warns of higher numbers in 2027. The previous estimate was for spending between $180 billion and $190 billion. At the top end of the new range, Alphabet may be the biggest spender on tech this year, with Amazon’s latest estimate putting it at more than $200 billion, although that figure could rise when the company reports results next week.

Google and its hyperscaler peers are building data centers full of advanced chips so they can provide the computing power needed to build and run leading AI models and the services they power.

Mizuho analysts wrote in a note that the increase in Google’s capex was “generally expected” and that the overall story was positive, driven largely by an increase in cloud revenue, which was up 82% from the previous year, exceeding past estimates. Cloud margins have expanded and adoption of Google’s Gemini model has accelerated.

“We are therefore surprised to see the stock trading after hours and expect it to rebound in tomorrow’s trading,” wrote analysts who recommend buying the stock.

Tesla’s reiterated that there is an expectation of over $25 billion in investment expenditures this year; This will represent approximately 200% growth on an annual basis. In the second quarter, investment expenditures increased by 142% to $5.79 billion. The company has increased spending on autonomous driving technology, artificial intelligence and robotics initiatives that CEO Elon Musk has been touting for years.