Investing in AI at all costs to drain cash flow! Alphabet Inc. Class C (GOOGL.US) and Tesla, Inc. (TSLA.US) plummeted after earnings, how much patience do investors have left?

On Wednesday, Alphabet (GOOGL.US) and Tesla, Inc. (TSLA.US) took the lead in kicking off the tech stock earnings season, and a theme quickly emerged - AI capital expenditures are now under the spotlight, facing the scrutiny of investors. Both companies delivered revenue results that exceeded expectations, but they both encountered selling pressure in after-hours trading due to the surge in AI capital expenditures and negative free cash flow - Tesla, Inc. dropped by over 4%, while Alphabet dropped by around 3%. This market anxiety sparked by "burning money" is setting the tone for the entire tech industry earnings season. So far, the surge in AI investment has largely been driven by record infrastructure spending by a few top companies, including heavy investments in model developers OpenAI and Anthropic. However, the emergence of low-cost open-source models from China and other regions, combined with signs of increasing scrutiny from the US business sector on AI service expenditures, is causing growing concerns about future investment returns in the market. Prior to the release of earnings reports on Wednesday, Alphabet's stock had been decreasing for three consecutive months after surging in April, while Tesla, Inc. had dropped by 11% since July and 17% year-to-date. The tech-heavy Nasdaq index, which hit a historic high in early June, has also fallen by about 5%. Alphabet Inc. Class C: Cloud business up 82%, but records first negative free cash flow in history Alphabet's second-quarter earnings report can be described as a "tale of two halves". Revenue was $119.8 billion, a 24% year-on-year increase, marking the 12th consecutive quarter of double-digit growth and exceeding Wall Street's expectations of $116.8 billion. Alphabet Inc. Class C's cloud business was the biggest highlight, with revenue soaring by 82% to $24.8 billion, surpassing analysts' expectations of $22.3 billion. The cloud business's backlog surpassed the $500 billion mark for the first time, reaching $514 billion, providing ample assurance for future growth. However, the capital market did not applaud this performance. Market concerns focused on the escalating AI capital expenditures. In the second quarter, Alphabet's capital expenditures totaled $44.9 billion, doubling year-on-year. The company also raised its full-year capital spending guidance from $180-190 billion to $195-205 billion for 2026, and explicitly stated that investment will "significantly increase" in 2027. Based on the new upper limit guidance, Alphabet is expected to become the highest-spending company in the tech industry this year - Amazon.com, Inc.'s latest expectations also exceed $200 billion, but this number may increase further after next week's earnings report is released. What surprised the market even more was that Alphabet Inc. Class C posted its first negative free cash flow in decades - negative $5.9 billion. This tech giant known for its hefty advertising profit margins and abundant cash flow is now spending more than it's earning. CFO Ruth Porat admitted during the earnings call that most of the capital expenditures were for AI infrastructure construction, with about 60% going to servers and 40% to data centers and network equipment. "We expect free cash flow to continue to be under pressure, which stems from investments in technology infrastructure that will enable us to seize the AI opportunity and continue to generate significant returns," Porat said. To support this round of AI infrastructure construction, Alphabet has already pre-reserved funds: it completed a $49.6 billion stock issuance in June, issued $20.3 billion in senior unsecured bonds, and prepared a $40 billion ATM stock issuance plan. Tesla, Inc.: the largest investment cycle in history, negative free cash flow turnaround Tesla, Inc. also delivered a "bright revenue" report. Revenue in the second quarter was $28.24 billion, a 26% year-on-year increase, exceeding market expectations; vehicle deliveries reached 480,100 units, also surpassing expectations. However, adjusted earnings per share were only $0.33, far below the market's expected $0.51 - the decline in profitability was mainly due to the dual pressure of lower average vehicle prices and huge AI investments. In the second quarter, Tesla, Inc.'s capital expenditures totaled $5.79 billion, a whopping 142% year-on-year increase, with a large amount of funds invested in FSD, AI training, Cybercab autonomous taxis, Optimus humanoid Siasun Robot & Automation assembly lines, and battery factory expansion - these are also strategic focuses CEO Elon Musk has been advocating for years. As a result, free cash flow turned negative for the first time in over two years, standing at -$1.09 billion. Nevertheless, Tesla, Inc. reiterated that capital expenditures for the full year 2026 will exceed $25 billion, a growth of about 200% compared to $8.5 billion in 2025, and will continue to increase in the next two to three years. The company is currently transforming factories to produce two-seat autonomous Cybercabs, developing the Optimus humanoid Siasun Robot & Automation still under construction, and preparing to build a large AI chip manufacturing plant in Texas. Musk said during the earnings call, "We should invest in capital expenditures as quickly as possible, as long as it's not wasteful. If we can get things done faster, even with slightly lower capital efficiency, it's fine." He even likened Tesla, Inc.'s massive investments in multiple areas to the industrial expansion when Henry Ford launched the Model T, calling it "possibly the fastest industrial scale expansion in the US since World War II." "This year is a big year for capital expenditures, but we believe that all investments will eventually yield substantial returns." Industry panorama: a $725 billion AI gamble The earnings performance of Alphabet and Tesla, Inc. has sounded the alarm for the entire tech industry earnings season. The scrutiny of AI investments in the market is becoming unprecedentedly harsh. The combined capital expenditures of Alphabet, Microsoft Corporation (MSFT.US), Amazon.com, Inc., and Meta (META.US) for 2026 are expected to reach a staggering $725 billion, and will further increase to nearly $900 billion by 2027. At the same time, the recent emergence of low-cost open-source models from China, coupled with increasing caution from US companies regarding AI service expenditures, is deepening market doubts about future investment returns. Analysis shows that by 2027, the increase in capital expenditures for tech giants will reach $534 billion, while the forecast increase in operating cash flow is only $340 billion - every additional $1 in cash flow corresponds to an additional $1.57 in investment. Morgan Stanley has further raised its 2027 and 2028 capital expenditure forecasts for Alphabet, Amazon.com, Inc., Microsoft Corporation, Meta, and SpaceX (SPCX.US) to approximately $1.23 trillion and $1.40 trillion. Optimists: These are "necessary sacrifices" Despite the market's pessimistic reaction, many analysts and investors remain optimistic about the long-term outlook. In a report, a Suizhou analyst stated that the increase in Alphabet Inc. Class C capital expenditures "roughly meets expectations", with cloud business revenue soaring by 82% year-on-year, far exceeding expectations, and the cloud business profit margin expanding, with accelerated growth in Gemini model usage. "We were surprised by the stock price drop after hours, and we expect it to rebound during tomorrow's trading session." The firm maintains a "buy" rating for Alphabet Inc. Class C. Keith Fitz-Gerald, head of investment consulting firm Fitz-Gerald Group, pointed out that Tesla, Inc. is currently "exchanging profitability for infrastructure", much like Amazon.com, Inc. and Netflix (NFLX.US) did in the past. "I expect this to bring substantial returns in the next 12 to 24 months or even 36 months." Rebecca Wettemann, CEO of tech research firm Valoir, said that Alphabet Inc. Class C's core business remains strong, and AI investments are starting to pay off. "The strong performance of Alphabet Inc. Class C should alleviate some of the market's concerns about excessive AI spending. The strong performance of its various businesses indicates that search is not dead, advertising is still important, and cloud investments are still a good bet." Alphabet CEO Sundar Pichai emphasized during the earnings call, "Our investments in AI are redefining the possibilities for all of our businesses." He also revealed that Alphabet Inc. Class C has launched pre-training for Gemini 4 and plans to accelerate model iteration speed. Next week, Meta and Microsoft Corporation will announce their earnings on July 29th, while Amazon.com, Inc. and Apple Inc. (AAPL.US) will follow on July 30th - at that time, the scrutiny of AI capital expenditures in the market will reach its peak.