Shares of Tesla and Alphabet took a hit in premarket trading on Thursday after both companies signaled a dramatic ramp-up in artificial intelligence spending, leaving investors rattled about the escalating costs of the AI arms race. Alphabet dropped roughly 4 percent while Tesla slid more than 5 percent, as markets digested second-quarter earnings reports that revealed mounting capital expenditures and negative free cash flow at both firms.
Alphabet raised its full-year capital expenditure forecast to between $195 billion and $205 billion, up from a previous range of $180 billion to $190 billion, and warned that spending would climb even higher in 2027. Tesla, for its part, reported a 142 percent year-on-year surge in capex during the second quarter to $5.79 billion and said it expects total spending for the year to exceed $25 billion. The sheer scale of those numbers was enough to unnerve even the most bullish investors, who have grown increasingly sensitive to whether the massive bets on AI infrastructure will translate into meaningful returns.
Executives at both companies moved quickly to defend the spending. Tesla CEO Elon Musk told investors on the company’s earnings call that this is a massive capex year but expressed confidence the investments would yield incredible returns, potentially the best the company has ever seen. He pointed to Tesla’s push into semiconductor production and the development of Optimus, its humanoid robot, as key areas where the money is flowing. Tesla said it is already installing first-generation production lines for Optimus and expects to begin manufacturing soon. Alphabet CEO Sundar Pichai struck a similar tone, explaining that the increased spending is primarily driven by an accelerated push to bring more computing capacity online to meet surging AI demand that the company currently cannot fully satisfy.
The spending concerns overshadowed what were otherwise encouraging signs of progress at both companies. Google’s cloud revenue jumped 82 percent to $24.8 billion, comfortably beating Wall Street forecasts and suggesting that at least some of its AI investments are starting to bear fruit. Tesla’s core automotive business also showed resilience, pulling in $20.52 billion in revenue, up 23 percent from a year earlier. Still, the question hanging over both stocks is whether the breakneck pace of investment will eventually pay off or whether investors will lose patience long before the returns materialize.