Alphabet and Tesla ramp up AI spending despite investor concerns

Alphabet and Tesla stepped up spending on artificial intelligence and future technologies despite reporting strong quarterly revenue, but investors reacted cautiously as both companies posted negative free cash flow and outlined even bigger investment plans.

The companies kicked off earnings season for major technology firms on Wednesday, with both reporting revenue that exceeded expectations. Even so, Alphabet shares fell more than 3% in after-hours trading, while Tesla dropped about 4% as investors focused on rising capital expenditure rather than sales growth.

AI spending takes centre stage

Alphabet raised its projected capital expenditure for 2026 to between $195 billion and $205 billion, up from its previous forecast. Most of the company's second-quarter investment went towards AI infrastructure, including servers and data centres needed to support growing demand for cloud computing and AI services.

Chief Financial Officer Anat Ashkenazi said the company's free cash flow would remain under pressure as Alphabet continues investing heavily in technical infrastructure to support long-term AI growth.

Tesla also reaffirmed plans to spend more than $25 billion this year, with investment focused on self-driving technology, AI, robotics and manufacturing. Chief executive Elon Musk said the company should spend "as fast as we can" provided the money is used efficiently.

Shares fall despite strong results

The heavy spending overshadowed otherwise solid financial results. Alphabet reported strong growth in its cloud business, with revenue rising 82% year over year as demand for AI-powered services increased.

Tesla, meanwhile, continued expanding projects including its Cybercab, Optimus humanoid robot programme and a planned AI chip manufacturing facility in Texas.

Both companies reported negative free cash flow during the quarter. Alphabet's fell to negative $5.9 billion, while Tesla posted negative $1.1 billion, reflecting the scale of their investment programmes.

Analysts remain optimistic

Despite the market's initial reaction, several analysts argued that the spending reflects a long-term strategy rather than financial weakness.

Some said Alphabet's cloud growth and expanding AI services justify the higher investment, while others compared Tesla's current spending cycle with Amazon's earlier expansion, suggesting profitability is being sacrificed to build future businesses.

The results also set the tone for the rest of earnings season, with investors expected to closely examine AI spending plans when Microsoft, Meta, Amazon and Apple report their latest financial results in the coming days.