Alphabet and Tesla test Wall Street's patience as AI spending overshadows growth

When Alphabet and Tesla kicked off tech earnings season on Wednesday, one theme became immediately clear: AI spending is under a microscope.

Both companies reported negative free cash flow for the latest quarter and told investors to prepare for higher capital expenditures. They both also reported better-than-expected revenue, but that wasn't enough to prevent an after-market selloff, with Tesla shares sliding 4% and Alphabet down more than 3%.

It's a potentially ominous sign for the tech industry, particularly the other megacaps, which are mostly set to report quarterly results next week. Meta and Microsoft are scheduled to report next Wednesday, followed a day later by Amazon and Apple .

Much of the AI boom to date has been fueled by historic levels of infrastructure spending among a small crop of companies, including hefty investments into model developers OpenAI and Anthropic. But the recent emergence of cheaper open-source models , largely out of China, along with signs that corporate America is getting more frugal when it comes to spending on AI services, has raised concerns about the future returns on investment.

Heading into Wednesday's reports, Alphabet's stock was already on pace for its third straight monthly decline after surging in April, while Tesla shares were down 11% in July and 17% for the year. The tech-heavy Nasdaq has dropped about 5% since reaching a record in early June.

While Alphabet and Tesla are both spending at unprecedented levels, their numbers vary dramatically.

Google's parent company forecast capex for this year of $195 billion to $205 billion and warned of higher numbers in 2027. Prior guidance was for spending of $180 billion to $190 billion. At the top end of the new range, Alphabet could be the biggest spender in tech this year, as Amazon's latest guidance was for more than $200 billion, though that number may increase when the company reports results next week.

Google and its hyperscaler peers are building out data centers packed with advanced chips so they can provide the computing power necessary to build and run the leading AI models and the services they power.

Mizuho analysts wrote in a note that Google's capex increase was "broadly anticipated," and that the overall story is positive, largely due to the surge in cloud revenue, which jumped 82% from a year earlier, blowing past estimates. Cloud margins expanded and usage of Google's Gemini model accelerated.

"As such we are surprised the stock is trading off after hours and would expect it to recover in trading tomorrow," wrote the analysts, who recommend buying the stock.

Tesla reiterated expectations for more than $25 billion in capex this year, which would represent about 200% year-over-year growth. In the second quarter, capex soared 142% to $5.79 billion. The company boosted spending on self-driving technology, AI and robotics initiatives that CEO Elon Musk has been touting for years.

Tesla is now retooling its factories to make the two-seater driverless Cybercab, and to manufacture Optimus humanoid robots, which are still being developed, while also preparing to start construction of a sprawling 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 said on the earnings call. He added, "It's ok to be a little less capital efficient if we get things done sooner."

For both companies, the aggressive growth plans are resulting in a major hit to their cash holdings.

Free cash flow at Tesla turned negative in the quarter, with a deficit of $1.1 billion after the company generated $146 million in free cash flow 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. He compared Tesla's spending and building in "many different arenas simultaneously," to that of Henry Ford with the Model T.

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