The Zhitong Finance App learned that on Wednesday, Alphabet (GOOGL.US) and Tesla (TSLA.US) took the lead in kicking off the tech stock earnings season, and one theme immediately surfaced — AI capital expenditure is being put in the spotlight and is being scrutinized by investors.
Both companies handed over revenue reports that exceeded expectations, but both experienced sell-offs in after-market transactions due to surging AI capital expenditure and negative free cash flow — Tesla fell more than 4%, and Alphabet fell about 3%. This market anxiety caused by “burning money” is setting the tone for the entire technology industry's earnings season.
To date, the AI boom has largely been fueled by record infrastructure investments from a few leading companies, including heavy bets on model developers OpenAI and Anthropic. Recently, however, cheap open source models from China and other places have risen to prominence, compounded by signs that the US business community is becoming more and more careful about AI service expenses, causing the market to worry more and more about future return on investment.
Before Wednesday's earnings report came out, Alphabet's stock price had been falling for three consecutive months after soaring in April; while Tesla had fallen 11% since July, with a cumulative drop of 17% during the year. The Nasdaq index, which is dominated by technology stocks, has also fallen by about 5% since reaching a record high in early June.
Google: Cloud business soared 82%, yet experienced the first negative cash flow in history
Alphabet's second-quarter earnings report can be called a “double day of ice and fire.” Revenue of $119.8 billion, up 24% year over year, achieved double-digit growth for the 12th consecutive quarter, higher than Wall Street's estimate of $116.8 billion. Google Cloud became the biggest highlight, with revenue soaring 82% year over year to US$24.8 billion, exceeding analysts' expectations of US$22.3 billion. The cloud business backlog (backlog) broke through the 500 billion US dollar mark for the first time, reaching 514 billion US dollars, providing sufficient guarantees for future growth.
However, capital markets did not cheer for this report card.
The market's concerns focus on expanding AI capital expenditure. Alphabet's capital expenditure reached 44.9 billion US dollars in the second quarter, doubling from the previous year. The company also further raised its capital expenditure guidance for the full year 2026 from US$180 billion to US$190 billion to US$1950 billion, and made it clear that it will also “significantly increase” investment in 2027.
According to the upper limit of the new guidelines, Alphabet is expected to become the company that spends the most in the tech industry this year — Amazon (AMZN.US), whose latest forecast also exceeds 200 billion US dollars, but this figure may rise further after the announcement of next week's earnings report.
What shocked the market even more was that Google experienced negative free cash flow in a single quarter for the first time in decades — negative $5.9 billion. The tech giant, known for its lucrative advertising margins and abundant cash flow, now spends more than it earns. Chief Financial Officer Anat Ashkenazi confessed during the earnings call that most of the capital expenditure is for AI infrastructure construction, of which about 60% is for servers and 40% for data centers and network equipment.
“We expect free cash flow to continue to be pressured, stemming from investments in technology infrastructure that will allow us to seize AI opportunities and continue to generate significant returns,” Ashkenazi said.
To support this round of AI infrastructure construction, Alphabet has already reserved funds in advance: completed the issuance of 49.6 billion US dollars of shares in June, issued 20.3 billion US dollars of senior unsecured bonds, and prepared a 40 billion US dollar ATM stock issuance plan.
Tesla: largest investment cycle in history, negative free cash flow
Tesla also handed over a “brilliant revenue” questionnaire. Revenue for the second quarter was US$28.24 billion, up 26% year over year, exceeding market expectations; 481,000 vehicles were delivered, which also exceeded expectations. However, adjusted earnings per share were only $0.33, far below market expectations of $0.51 — the decline in profitability was mainly squeezed by falling average car sales prices and huge investment in AI.
Tesla's capital expenditure in the second quarter was US$5.79 billion, a sharp increase of 142% over the previous year, and a large amount of capital was invested in FSD, AI training, Cybercab driverless taxis, Optimus humanoid robot production line, and battery factory expansion — these areas are also the strategic focus that CEO Elon Musk has continued to advocate for many years. As a result, free cash flow turned negative for the first time after a lapse of more than two years, to -1.09 billion US dollars.
Despite this, Tesla reiterated that capital expenditure for the full year of 2026 will exceed $25 billion, an increase of about 200% over the $8.5 billion in 2025, and will continue to grow over the next two to three years. The company is remodeling the plant to produce a two-seater driverless Cybercab, making the Optimus humanoid robot still under development, and preparing to build a large-scale AI chip manufacturing plant in Texas.
Musk said on the earnings call: “We should invest in capital expenditure as quickly as possible, as long as we don't waste it. If you can get things done faster, even if capital efficiency is slightly lower, no problem.” He even compared Tesla's large-scale investment in multiple fields at the same time to Henry Ford's industrial expansion when the Model T was launched, saying “this is probably America's fastest industrial scale expansion since World War II.” “This is a big year of capital expenditure, but we are convinced that all the investment will eventually pay off handsomely.”
Industry panorama: $725 billion AI gamble
Alphabet and Tesla's financial statements sounded a wake-up call for the entire tech industry's earnings season. The market's scrutiny of AI investments is becoming more stringent than ever.
The total capital expenditure of the four companies Alphabet, Microsoft (MSFT.US), Amazon, and Meta (META.US) is expected to reach 725 billion US dollars in 2026, which will further rise to nearly 900 billion US dollars by 2027.
At the same time, the low-cost open source model recently introduced in China, and the growing prudence of US companies in spending on AI services, have caused the market to have deeper doubts about the future return on related investments. The analysis shows that by 2027, the capital expenditure of tech giants will increase to $534 billion, while the increase in operating cash flow is expected to be only $340 billion — every additional $1 in cash flow corresponds to an additional investment of $1.57 billion. Morgan Stanley further raised the 2027 and 2028 capital expenditure forecasts for the five companies Alphabet, Amazon, Microsoft, Meta, and SpaceX (SPCX.US) to about $1.23 trillion and $1.40 trillion.
Optimist: It's a “necessary sacrifice”
Despite pessimistic market reactions, many analysts and investors remain optimistic about the long-term outlook.
Mizuho analysts said in the report that Google's capital expenditure increase was “generally in line with expectations,” cloud business revenue surged 82% year over year, far exceeding expectations, cloud business profit margins expanded, and Gemini model usage grew at an accelerated pace. “We were surprised by the after-hours decline in the stock price and expect it to pick up during tomorrow's trading session.” The bank maintains Google's “buy” rating.
Keith Fitz-Gerald, head of investment consulting firm Fitz-Gerald Group, pointed out that Tesla is currently “exchanging profitability for infrastructure,” just as Amazon and NFLX.US (NFLX.US) experienced back then. “I expect this to pay off handsomely over the next 12 to 24 or even 36 months.”
Rebecca Wettemann, CEO of science and technology research institute Valoir, said that Google's core business is still strong, and AI investment is paying off. “Google's growth should allay some market concerns about excessive AI spending. The strong performance of its various businesses shows that search is not dying out, advertising is still important, and investing in the cloud is still a good bet.”
Alphabet CEO Sundar Pichai emphasized at the earnings conference: “Our investment in AI is redefining the possibilities that can be achieved in the company's various businesses. He also revealed that Google has begun pre-training for Gemini 4 and plans to further speed up model iterations.
Next week, Meta and Microsoft will release financial reports on July 29 EST, and Amazon and Apple (AAPL.US) will follow up on July 30 — at that time, the market's scrutiny of AI capital expenditure will reach its climax.