AI Spending Spree Spooks Markets! Tesla Shares Crash Over 10%, Alphabet Plunges Nearly 6%

Alphabet (GOOGL-US) and Tesla (TSLA-US) saw their stock prices plummet during Thursday's (23rd) trading session after both companies released their second-quarter earnings, signaling a significant ramp-up in artificial intelligence (AI) investments. Simultaneously, both reported negative free cash flow, triggering investor concerns that the escalating costs of the AI boom have yet to translate into tangible returns.

As of press time, Tesla (TSLA-US) shares were down 10.64%, temporarily trading at $334.22 per share. Alphabet (GOOGL-US) shares dropped 5.99%, hovering at $321.59. Both companies had already closed Wednesday down 1.3% and 1.46% respectively, with selling pressure intensifying after the earnings announcements.

Alphabet, Google's parent company, raised its full-year capital expenditure forecast from the initial $180 billion to $190 billion to a new range of $195 billion to $205 billion. The company also warned that spending could rise further through 2027. CEO Sundar Pichai stated the increased spending is primarily aimed at accelerating compute capacity delivery to meet growing AI demand, noting the company currently lacks sufficient computing power to meet customer needs.

However, investors are concerned about Alphabet's surging capital expenditures, weakening profit margin outlook, the continued delay of Gemini 3.5 Pro, and the lack of any standout new products. These factors have led to skepticism over whether the massive AI investments are translating into clear competitive advantages.

Despite these concerns, Alphabet's earnings report did include some bright spots. Google Cloud's Q2 revenue surged 82% year-over-year to $24.8 billion, exceeding market expectations. The division's operating profit margin also jumped significantly from 20.7% a year earlier to 35.6%, indicating that some AI and cloud investments are beginning to yield results.

Tesla's capital expenditures in Q2 rose 142% year-over-year to $5.79 billion, with full-year spending expected to exceed $25 billion. CEO Elon Musk attempted to reassure investors, stating that this year will be one of exceptionally high capital spending, but believes the investments will generate "possibly the best return on capital in the company's history."

Musk emphasized that funds will be directed toward semiconductor production and the humanoid robot project, Optimus. Tesla is currently installing the first-generation Optimus production line and expects to begin production soon. Meanwhile, its core automotive business reported Q2 revenue of $20.52 billion, a 23% year-over-year increase.

While both companies emphasize the long-term potential of AI investments, with free cash flow turning negative and capital expenditures continuing to balloon, investors are increasingly focused on how long it will take for these massive outlays to translate into profits substantial enough to justify their valuations.