AI money-burning war upgrade! Google, Tesla's cash flows both turn negative, Wall Street optimistic about long-term returns
July 23, Financial Associated Press News At present, the latest round of financial reporting season for U.S. stocks is slowly kicking off, and technology giants are facing a severe test regarding "AI investment return." During this earnings season, AI spending has become a top priority for investors and is being scrutinized like a microscope. On Wednesday, two of Google’s parent companies, Alphabet and Tesla, among the “Seven Big Tech Companies” in the U.S. stock market, announced their second-quarter financial results on the same day. One thing in common: Both companies reported negative free cash flow in their latest quarterly results and told investors to prepare for higher capital spending.
July 23, Financial Associated Press News At present, the latest round of financial reporting season for U.S. stocks is slowly kicking off, and technology giants are facing a severe test regarding "AI investment return." During this earnings season, AI spending has become a top priority for investors and is being scrutinized like a microscope. On Wednesday, two of Google’s parent companies, Alphabet and Tesla, among the “Seven Big Tech Companies” in the U.S. stock market, announced their second-quarter financial results on the same day. One thing in common: Both companies reported negative free cash flow in their latest quarterly results and told investors to prepare for higher capital spending. Although the revenue of both companies was better than expected, it was not enough to prevent the stock price from falling after the bell: Tesla's stock price fell more than 4%, and Alphabet's stock price fell nearly 3%. This may be a negative signal for the technology industry, especially other technology giants that will release financial reports next week. Meta and Microsoft are scheduled to release earnings reports next Wednesday, followed by Amazon and Apple next Thursday. The AI boom so far has been largely driven by record infrastructure spending by a handful of big tech companies, including huge investments in model developers OpenAI and Anthropic. However, the recent emergence of cost-effective open source models and signs that U.S. companies are becoming more frugal in spending on AI services have triggered concerns about the future investment returns of technology giants. After surging sharply in April, Alphabet stock is heading for its third consecutive monthly decline. Tesla’s stock price has fallen by 11% in July, and has fallen by 17% during the year. The tech-heavy Nasdaq index has also fallen about 5% since hitting a record high in early June. unprecedented levels of spending Although both Alphabet and Tesla are spending at unprecedented levels, the exact amount of investment varies widely between the two companies. Alphabet expects capital expenditures of $195 billion to $205 billion this year and warned it would be even higher in 2027. Previous guidance was $180 billion to $190 billion. At the upper end of the new guidance range, Alphabet could become the tech industry's top capex spender this year, as Amazon's latest capex guidance to date is more than $200 billion (although that number may be revised upward when the company reports earnings next week). Google and other large cloud service providers are building large-scale data centers equipped with advanced chips to provide the computing power needed to build and run top AI models and the services they support. In contrast, Tesla reiterated that capital expenditures are expected to exceed $25 billion this year (representing approximately 200% year-over-year growth) and will continue to grow over the next two to three years. In the second quarter of this year, Tesla's capital expenditures surged 142% to $5.79 billion. The company has increased its investment in self-driving technology, AI and robotics projects that CEO Elon Musk has been touting for years. Tesla is currently renovating the factory to produce the two-seat driverless Cybercab and the Optimus humanoid robot, which is still under development, and is also preparing to start construction of a huge AI chip manufacturing plant in Texas. "We should be investing capital as quickly as possible without creating too much waste," Musk said on the earnings call. “It doesn’t matter if it’s a little less capital efficient if you can get things done faster.” Musk also boasted that Tesla is undergoing the fastest industrial expansion since World War II. He emphasized that this year is an extremely large year for capital expenditures, but he is confident that all projects invested in will generate incredible returns. The aggressive expansion plans of both companies have led to a significant reduction in their cash reserves. Tesla's free cash flow in the second quarter was negative $1.1 billion, the first time it turned negative in more than two years, compared with $146 million in the same period last year and $1.44 billion in the first quarter of this year.
"We expect free cash flow to remain under pressure stemming from our investments in technology infrastructure that enable us to capture the AI opportunity and continue to drive attractive returns," Alphabet Chief Financial Officer Anat Ashkenazi said on the earnings call. Ashkenazi said most of the $44.9 billion in capital expenditures in the second quarter was invested in AI-related infrastructure. Wall Street bullish on long-term returns Although the stock price performance of Alphabet and Tesla after the announcement of their earnings reports shows that their aggressiveness in "burning money" for AI has caused investors to ignore their outstanding revenue performance. But the enthusiasm of Wall Street analysts has not been extinguished. They are still optimistic about the two technology giants, believing that short-term cash burn will be exchanged for long-term returns. Analysts at Mizuho Securities wrote in a report that Google's move to increase its capital expenditure forecast was "basically within expectations" and the overall narrative was positive, mainly due to the surge in cloud revenue - which surged 82% year-on-year, far exceeding expectations. While cloud business profit margins are expanding, usage of Google's Gemini model is also accelerating. "We are therefore surprised by the (Alphabet) share price decline after hours and expect shares to recover in tomorrow's trading," analysts at the bank wrote, recommending a buy on the stock. Rebecca Wettemann, CEO of technology research firm Valoir, said that Google's core business remains strong and that its AI investments are paying off. As for Tesla, Keith Fitz-Gerald, head of the investment consulting firm Fitz-Gerald Group, said that the company is now "sacrifice of short-term profits for AI infrastructure." This model is exactly the same as that of Amazon, Netflix and other companies in the early years. "I expect this to pay off handsomely over the next 12 to 24 months, maybe even 36 months," Fitz-Gerald wrote after Tesla's earnings report.
"We expect free cash flow to remain under pressure stemming from our investments in technology infrastructure that enable us to capture the AI opportunity and continue to drive attractive returns," Alphabet Chief Financial Officer Anat Ashkenazi said on the earnings call. Ashkenazi said most of the $44.9 billion in capital expenditures in the second quarter was invested in AI-related infrastructure. Wall Street bullish on long-term returns Although the stock price performance of Alphabet and Tesla after the announcement of their earnings reports shows that their aggressiveness in "burning money" for AI has caused investors to ignore their outstanding revenue performance. But the enthusiasm of Wall Street analysts has not been extinguished. They are still optimistic about the two technology giants, believing that short-term cash burn will be exchanged for long-term returns. Analysts at Mizuho Securities wrote in a report that Google's move to increase its capital expenditure forecast was "basically within expectations" and the overall narrative was positive, mainly due to the surge in cloud revenue - which surged 82% year-on-year, far exceeding expectations. While cloud business profit margins are expanding, usage of Google's Gemini model is also accelerating. "We are therefore surprised by the (Alphabet) share price decline after hours and expect shares to recover in tomorrow's trading," analysts at the bank wrote, recommending a buy on the stock. Rebecca Wettemann, CEO of technology research firm Valoir, said that Google's core business remains strong and that its AI investments are paying off. As for Tesla, Keith Fitz-Gerald, head of the investment consulting firm Fitz-Gerald Group, said that the company is now "sacrifice of short-term profits for AI infrastructure." This model is exactly the same as that of Amazon, Netflix and other companies in the early years. "I expect this to pay off handsomely over the next 12 to 24 months, maybe even 36 months," Fitz-Gerald wrote after Tesla's earnings report.