(LR) Google CEO Sundar Pichai speaks and Tesla and SpaceX CEO Elon Musk arrive at the opening ceremony before Donald Trump is sworn in as the 47th US President at the US Capitol Rotunda in Washington, DC, on Jan. 20, 2025.
Saul Loebe | Via Reuters
When Alphabets again Tesla kicked off tech earnings season on Wednesday, one theme quickly became clear: The use of AI is under the microscope.
Both companies reported negative free cash flow for the latest quarter and told investors to prepare for higher capital costs. Both also reported better-than-expected earnings, but that wasn’t enough to prevent an aftermarket selloff, with Tesla shares down 4% and Alphabet down more than 3%.
It’s a potentially ominous sign for the tech industry, especially some megacaps, which are scheduled to report quarterly results next week. Meta again Microsoft they are scheduled to report next Wednesday, and the following day Amazon again an apple.
Much of AI development to date has been driven by historical levels of infrastructure use among small corporate plants, including capital investments in model developers OpenAI and Anthropic. But the recent emergence of cheaper open-source models, especially from China, and signs that corporate America is getting more economical when it comes to spending money on AI services, have raised concerns about future returns on investment.
Going into Wednesday’s report, Alphabet’s stock was already on pace for its third consecutive monthly decline after surging in April, while Tesla’s shares were down 11% in July and 17% for the year. The tech-heavy Nasdaq is down about 5% since hitting a record high in early June.
While Alphabet and Tesla are both spending at unprecedented levels, their numbers differ greatly.
Google’s parent company forecast capex for this year of $195 billion to $205 billion and warned of higher numbers in 2027. Earlier guidance was to spend $180 billion to $190 billion. At the top end of the new list, Alphabet could be the biggest investment in technology this year, as Amazon’s latest guidance was $200 billion, although that figure could rise if the company reports results next week.
Google and its hyperscaler peers are building data centers full of advanced chips to provide the computing power needed to build and run advanced AI models and the services they use.
Mizuho analysts noted that the increase in Google’s capex was “widely expected,” and that the overall story is positive, especially due to the increase in cloud revenue, which jumped 82% from last year, beating previous estimates. Cloud margins have expanded and the use of Google’s Gemini model has accelerated.
“We are therefore surprised that the stock is moving after hours and can expect it to return to trading tomorrow,” wrote the analysts, who recommend buying the stock.
‘As soon as we can use it’
Tesla reiterated expectations for more than $25 billion in revenue this year, which would represent 200% year-over-year growth. In the second quarter, capex increased 142% to $5.79 billion. The company has increased spending on self-driving technology, AI and robotics that CEO Elon Musk has been touting for years.
Tesla is now retooling its factories to make the two-seater Cybercab, and the Optimus humanoid robots, which are still in development, while preparing to start construction on an AI chip manufacturing facility in Texas.
“We have to spend capex as quickly as we can, as quickly as possible without wasting too much,” Musk said on the earnings call. He added, “It’s okay to spend a little money if we do things quickly.”
For both companies, aggressive growth plans are leading to a big hit on their finances.
Tesla’s free cash flow turned negative for the quarter, with a deficit of $1.1 billion after the company generated $146 million in free cash flow last year and $1.44 billion in the first quarter of 2026.
“This is a big year but we are confident that all these things we are investing in will bring amazing profits,” said Musk. He compared Tesla’s use of building “in many different fields at the same time,” to Henry Ford and the Model T.
“I think this is probably the fastest industrialization rate since World War II in America,” Musk said.
Alphabet’s numbers were stark, with free cash flow falling to a negative $5.9 billion after the company, buoyed by its fuel from online advertising, generated nearly $25 billion in free cash flow last year.
“We expect free cash flow to remain under pressure, driven by our investment in technology infrastructure, which enables us to take advantage of AI and continue to deliver attractive returns,” CFO Anat Ashkenazi said on the earnings call.
Most of the $44.9 billion in capex in the second quarter went to infrastructure to support AI development, 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 the hot computer demand, we build on the recent computer agreement with Musk’s SpaceXnow owns xAI and its Memphis data centers.
Wednesday’s results did nothing to dampen the enthusiasm of bullish analysts and investors.
Keith Fitz-Gerald, a principal at investment consulting firm Fitz-Gerald Group, said that at Tesla, “profits are driven by infrastructure” as was the case at companies including Amazon and Netflix.
“I expect it will pay off slowly over the next 12-24 months, even 36 months,” Fitz-Gerald wrote in a note after the report.
And Rebecca Wettemann, CEO of technology research firm Valoir, said in an email that Google’s core business remains strong and that its AI investments are paying off.
“Google’s push should ease market fears about AI overuse,” he wrote. “The strong performance across its businesses shows that search is not dead, advertising is still important, and cloud investments are still a good bet.”
WATCH: Tesla stock sliding on EPS miss
