Google and Tesla shares plunge as AI spending rattles markets
Shares of Google and Tesla fell on Thursday as investors feared more money spent on artificial intelligence (AI).
The share price of Google parent company Alphabet fell by nearly 7%, while shares of Elon Musk’s electric vehicle maker Tesla fell by 14.5%.
Both reported negative free cash flow (money remaining after paying for operations and investments) in financial results Wednesday and pledged to spend billions more in the coming months and years.
Google saw its cash measure turn negative for the first time since it became a publicly traded company in 2004, according to its financial records.
As major tech companies race to capitalize on a new wave of AI technology, investors are wondering when the financial benefits will emerge.
Alphabet expects to spend as much as $205 billion this year, mainly on AI projects and infrastructure; That’s a $15 billion increase over the spending forecast he gave just three months ago.
Tesla, meanwhile, expects to spend up to $25 billion on unspecified projects this year.
“There is still a healthy degree of skepticism about the ability of these investments to generate adequate returns,” said Russ Mould, investment director at AJ Bell.
Alphabet’s total quarterly revenue reached $119.8 billion, an increase of 23% compared to the same period last year.
Although Google parent company Alphabet has seen its business continue to grow in recent months, heavy spending on artificial intelligence (AI) infrastructure has pushed its remaining cash into negative territory.
According to historical financial records, the company’s free cash flow was negative $5.9bn (£4.3bn) for the first time in at least a decade.
The stock quickly fell 4% in after-hours trading.
In a call with financial analysts, Google’s finance chief Anat Ashkanazi stated that the company recorded negative free cash flow due to increased capital expenditures, which were mainly related to artificial intelligence expenses.
He said the company spent $45 billion in the second quarter, with 60 percent of the cost going to servers and 40 percent to data centers.
Alphabet’s capital spending was $36 billion in the first quarter of this year.
Ashkanazi said during the meeting that when it comes to artificial intelligence, “demand still exceeds investment.”
“We will continue to invest as long as we see these attractive investment opportunities.”
Sundar Pichai, Google’s CEO, said the technological shift towards AI tools and capabilities still “feels like early breakthroughs in the shift across multiple areas” and that the company’s plans to generate financial returns on its spending are “disciplined.”
“From what I’ve seen of what you can do with edge capabilities, there’s still a lot of work to be done to translate this into experiences for our users. So these look like extraordinary opportunities with extraordinary returns.”
Rachel Winter, partner at asset management firm Killik & Co, said there were some surprises among investors about how much Google was spending.
“These are huge numbers. The fact that shares fell when the results were announced shows that there is some concern about these levels.”
Tesla reported negative free cash flow of $1.1 billion for the second quarter on Wednesday due to increased capital costs.
This was the first negative showing of the company’s remaining cash in two years, according to financial records.
Tesla’s plan to spend $25 billion this year is more than double its capital spending in 2025.
Tesla is in a “major investment cycle” and its spending will likely increase further over the next three years, Tesla finance chief Vaibhav Taneja said on Wednesday.
