Alphabet and Tesla shares slip as AI spending tests investors

Alphabet and Tesla both sold off after hours Wednesday as investors focused less on stronger revenue and more on how much cash the companies are pouring into artificial intelligence. For everyday investors, the message was clear: AI growth still excites Wall Street, but the bill is getting harder to ignore.

Both companies reported negative free cash flow in the second quarter, according to their quarterly results. Free cash flow is the cash a company has left after running the business and paying for capital projects such as factories, data centers and chips. When that number turns negative, it means spending is outpacing cash generation for the period.

Tesla shares fell about 4% in after-hours trading, while Alphabet dropped more than 3%, according to CNBC market data. Both companies topped revenue expectations, but investors reacted to higher capital expenditure plans, or capex, which refers to spending on long-term assets such as manufacturing lines, servers and data centers.

The timing matters for the broader tech trade. Meta and Microsoft are scheduled to report results next Wednesday, with Amazon and Apple set to follow a day later. The Nasdaq, which is weighted toward technology stocks, has declined about 5% since reaching a record in early June, according to CNBC.

Alphabet raised its 2026 capex outlook to $195 billion to $205 billion, up from prior guidance of $180 billion to $190 billion, according to the company. The Google parent also told investors to expect higher spending in 2027. Amazon previously guided for more than $200 billion in spending, CNBC reported, though that figure could change when Amazon reports next week.

Alphabet said most of its $44.9 billion in second-quarter capex went toward infrastructure for AI. That includes the data center buildout needed to train and run large AI models. CFO Anat Ashkenazi said on the earnings call that free cash flow would remain pressured by technical infrastructure spending, which she said supports Alphabet’s AI opportunity and future returns.

The cash hit was sharp. Alphabet reported negative free cash flow of $5.9 billion in the quarter, compared with nearly $25 billion in positive free cash flow a year earlier, according to the company.

Alphabet’s cloud business gave bulls something to point to. Mizuho analysts wrote that Google’s higher capex was “broadly anticipated” and said the broader setup looked positive because Google Cloud revenue jumped 82% from a year earlier, margins expanded and use of Gemini accelerated. The analysts said they were surprised by the stock’s after-hours decline and maintained a buy recommendation.

Tesla also kept spending in high gear. The company reiterated expectations for more than $25 billion in capex this year, which would be about 200% growth from a year earlier. Second-quarter capex rose 142% to $5.79 billion, according to Tesla.

The electric vehicle maker is spending on self-driving technology, AI and robotics projects that CEO Elon Musk has promoted for years. Tesla is reworking factories for its two-seat driverless Cybercab, preparing manufacturing for Optimus humanoid robots that remain in development, and planning construction of an AI chip plant in Texas, CNBC reported.

“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 that “it’s ok to be a little less capital efficient if we get things done sooner.”

Tesla’s free cash flow swung to negative $1.1 billion in the quarter. The company had generated $146 million a year earlier and $1.44 billion in the first quarter of 2026.

Some analysts and investors remained upbeat. Keith Fitz-Gerald, principal at Fitz-Gerald Group, wrote that Tesla is sacrificing profitability for infrastructure, comparing the pattern to earlier investment cycles at Amazon and Netflix. Rebecca Wettemann, CEO of Valoir, said Google’s core business remains strong and wrote that its AI investments are producing returns.

This story draws on original reporting from CNBC.