Shares of both Tesla and Alphabet fell sharply on Thursday after management from both companies signaled plans for increased spending related to artificial intelligence initiatives, raising concerns among investors about the escalating costs associated with the AI boom.
Market Performance and Financial Impact
The decline was significant across major tech stocks. Tesla stock closed 14.5% lower, marking its worst day since March 2025, while Alphabet’s shares lost 7.1%. The market saw substantial value reduction for both firms; Tesla lost approximately $200 billion in market capitalization on Thursday, and the parent company of Google lost roughly $300 billion.
Financially, both tech leaders reported negative free cash flow during the second quarter (Q2) after filing their earnings reports on Wednesday. The heightened spending forecasts were a key factor driving investor worry.
Increased Capital Expenditure Plans
Management at both corporations provided updated capital expenditure (capex) projections for the coming years, indicating massive investments in technology infrastructure. Alphabet adjusted its capex forecast for this year to fall between $195 billion and $205 billion, while also cautioning that figures are expected to rise further in 2027. This revised guidance surpassed their previous estimate of $180 billion to $190 billion.
Tesla reported a significant increase in spending for the second quarter, with capex surging 142% year on year to reach $5.79 billion. Looking ahead, the automaker stated it anticipates allocating more than $25 billion in capital expenditures this calendar year.
Optimism Meets Skepticism
Leaders at both companies defended their spending increases as necessary steps for future growth. During its earnings call on Wednesday, Elon Musk characterized the period as requiring “a massive capex year,” expressing confidence that all current investments would generate “incredible returns.”
Musk highlighted key initiatives such as semiconductor production and Optimus, Tesla’s humanoid robot. The company reported in its presentation that it is currently “installing the first-generation lines for Optimus” and expects to begin production shortly.
Alphabet’s CFO explained the increased spending by citing an “acceleration in the delivery of capacity to meet growing demand.” He emphasized that the tech giant believes it does not possess sufficient computing power to fulfill the increasing demand driven by AI.
However, skepticism remained among analysts. Ben Barringer, head of technology research at Quilter Cheviot, noted that investors appear to be focusing heavily on the rise in capital expenditure alongside weaker margin outlooks. He added that continued delays concerning Gemini 3.5 Pro and a lack of highly anticipated product releases have raised questions about whether Alphabet’s AI investments are yet translating into a clear competitive edge.
Areas of Strength
Despite the overall market concerns, both companies reported some strong operational performance metrics. Google’s cloud services showed signs of successful investment payoff; its cloud revenue jumped 82% year on year to $24.8 billion in Q2, surpassing analyst predictions.
“This is one of the strongest revenue growth quarters that Alphabet has had in five years, and Alphabet is a really great barometer for this whole AI wave,” Alison Porter, portfolio manager at Janus Henderson, stated during a discussion on the company’s performance.
Porter further pointed to the robust financial health of Google Cloud, noting the division’s operating margin rose sharply to 35.6% in Q2, compared to 20.7% during the same period last year. Regarding Tesla, the core automotive business generated $20.52 billion in revenue, representing a 23% increase year over year.
