Revenue Up, Cash Flow Down: Alphabet, Tesla Plunge as AI Spending War Becomes a Wildcard [Invest 360] — BigGo Finance

An ironic situation unfolded as the darlings of the artificial intelligence era posted record revenues only to see their stock prices plummet. Investors are no longer looking solely at “earnings” and have begun scrutinizing “cash flow.” Google parent Alphabet (GOOGL) and Tesla (TSLA) reported strong second-quarter results, but their shares tanked as cash rapidly drained away due to astronomical spending on AI infrastructure.

On July 23 (local time), Alphabet shares closed at $317.69 on the New York Stock Exchange, down 7.13% from the previous session. Tesla fared even worse, plunging 14.52%. Both companies reported second-quarter revenue after the previous day’s market close that exceeded market expectations, but deteriorating cash flow driven by expanded AI investments dragged them down.

Alphabet posted second-quarter revenue of $119.8 billion, up 24% year-over-year. Google Cloud revenue, in particular, surged 82% to $24.8 billion, far surpassing market expectations of 65% growth. The cloud backlog reached $514 billion, an increase of more than $50 billion from the prior quarter. However, the market focused more on “how much was spent to make money” rather than “how much money was made.” Alphabet’s second-quarter capital expenditure (capex) came in at $44.9 billion, up 25.8% from the previous quarter, exceeding operating cash flow. As a result, free cash flow (FCF) recorded a deficit of $5.9 billion. This marks the company’s first quarterly FCF deficit since its 2004 IPO.

Alphabet didn’t stop there, raising its annual capex forecast to a range of $195 billion to $205 billion, up from the previous estimate of $180 billion to $190 billion. Anat Ashkenazi, Alphabet’s Chief Financial Officer, explained, “We are accelerating the pace of infrastructure supply to meet growing computing demand,” adding that “computing capacity is still insufficient to handle current AI demand.” She also signaled that capex in 2027 would increase significantly from this year’s level, suggesting a prolonged investment burden.

Tesla’s situation is no different. Second-quarter revenue rose 26% year-over-year to $28.2 billion, and vehicle deliveries increased 25% to 480,000 units—a record for a second quarter. However, operating profit fell 57% from a year earlier, and the operating margin was a mere 1.4%. Declining average vehicle selling prices, rising R&D costs, and reduced regulatory credit revenue eroded profitability. Second-quarter capex surged 142% year-over-year to $5.8 billion, and free cash flow also turned negative with a $1.1 billion deficit. Tesla plans to invest more than $25 billion this year in autonomous driving, robotaxis, and the humanoid robot “Optimus.” CEO Elon Musk emphasized during the earnings conference call that “this is a year of massive capital expenditure” and expressed confidence that “the investments underway will deliver the highest return on capital expenditure we’ve ever seen,” but it wasn’t enough to quell investor concerns.

This trend of expanding investment appears poised to spread across Big Tech. According to a Reuters analysis, if current trends continue, the capital expenditures of five companies—Alphabet, Microsoft, Amazon, Meta Platforms, and Oracle—are projected to exceed their free cash flow by 2027. Meta’s free cash flow, in particular, is expected to plummet 95.7% to just $1.85 billion, while Microsoft’s FCF is forecast to shrink to $25.4 billion, less than half of the $58.7 billion recorded in the previous fiscal year.

The ratio of capital expenditure to revenue is also rising rapidly. Meta’s ratio is projected to jump from 35.9% to 54.9%, Alphabet’s from 23% to 41%, Microsoft’s from 31% to 45%, and Amazon’s from 18% to 25%. This means nearly half of the money these companies earn is being poured back into infrastructure.

Views on Wall Street are mixed. Bank of America (BofA) maintained a “Buy” rating on Alphabet with a $430 price target. BofA analysts noted “a clear disconnect between what the market is seeing and the actual quarterly results,” positively evaluating accelerating cloud growth and improving profitability. Indeed, Google Cloud’s operating margin improved significantly from 20.7% in the second quarter of last year to 35.6% this year. BofA interpreted this as a signal that AI infrastructure is securing attractive utilization rates and pricing power. Conversely, Ben Barringer, head of technology research at Quilter Cheviot, pointed out that “investors are focusing on the sharp increase in capital expenditure and the weakening margin outlook,” adding that “the delayed launch of Gemini 3.5 Pro and the absence of new products that exceed expectations are also raising questions about whether AI investments are translating into a real competitive advantage.”

Rising military tensions in the Middle East also contributed to the tech sell-off that day. Brent crude futures topped $100 per barrel for the first time since May, and the yield on the 10-year U.S. Treasury note surged to its highest level since early 2025. Rising interest rates are particularly unfavorable for technology stocks, which have future growth prospects priced into their valuations. These companies faced a double whammy: deteriorating cash flow from increased investment combined with a higher discount rate.

Matt Miskin, co-chief investment strategist at Manulife John Hancock Investment, noted that “overall, the earnings numbers are excellent, but factors that can drag down stock prices emerged across multiple companies,” citing the increase in capex as a prime example. He diagnosed that “stocks are being sold off at the slightest sign of weakness.”

Meanwhile, Google’s aggressive investment served as a positive catalyst for South Korea’s semiconductor industry. As concerns about a “peak-out” in AI investment subsided, shares of Samsung Electronics and SK hynix rose 3.65% and 4.86%, respectively, on July 23. Lee Jung-hwan, a professor in the Department of Economics and Finance at Hanyang University, assessed that “one of the reasons semiconductor stocks recently plunged was concern that Big Tech’s AI investment might be peaking, and Google’s ‘upward revision of investment’ has partially alleviated those worries.”

The earnings reports from Microsoft, Meta, and Amazon scheduled for next week are expected to serve as a watershed moment for gauging the direction of the AI investment race. Lee Eun-taek, an analyst at KB Securities, said, “Ultimately, the market understands that AI investment is a good thing, but it’s asking how long companies can sustain this spending.” He predicted that “Amazon, which faces the greatest suspicion of excess capex among Big Tech, and Meta, which was at the center of the computing lease controversy in early July, are both highly unlikely to halt their own capex voluntarily.”