Shares of Google parent Alphabet and electric vehicle giant Tesla fell sharply after investors reacted nervously to the companies’ latest earnings reports, which revealed billions of dollars of extra spending on artificial intelligence (AI) infrastructure despite mounting pressure on profits and cash flow.
The sell-off sent major U.S. stock indexes down and rekindled fears that Wall Street’s love affair with AI may be rushing headlong into the staggering cost of constructing the computing infrastructure to support the technology. Analysts said the market is increasingly looking beyond sales growth at whether the AI spending splurge that has never been seen before can deliver real returns.
Alphabet shares sank nearly 7%, while Tesla slumped more than 14%, in one of the automaker’s worst trading sessions in recent years. The losses destroyed tens of billions of dollars in market value and put heavy pressure on the technology-heavy Nasdaq index.
Alphabet posted solid revenue growth from its search company, cloud computing division and AI-powered services but investors were spooked after executives said they would ramp up capital investment even more this year.
The corporation increased its AI spending outlook, forecasting it will spend up to $205 billion on data centres, AI processors and cloud infrastructure to compete in the fast-moving artificial intelligence competition.
Alphabet also posted negative free cash flow despite strong revenue, adding to investor concerns that higher AI expenditures could drag on profitability in the near term.
Tesla’s slide was even more pronounced after the firm posted poor quarterly profits coupled with negative free cash flow.
The electric vehicle maker has increased investments in AI technologies including autonomous driving software, humanoid robots and high-performance computing infrastructure. Many investors asked when these investments, which CEO Elon Musk said were needed for Tesla’s future, would start returning significant money.
Concerns that profits could be under pressure for some time were fuelled by Tesla’s substantial capital spending alongside earnings that were worse than projected.
Artificial intelligence has led the way for more than two years in the gains of global technology stocks.
Hundreds of billions of dollars have been spent by companies on next-generation AI chips, cloud infrastructure, data centres and massive language models in a drive for supremacy in the nascent industry.
But analysts say investors are starting to look for proof that such massive spending will lead to sustainable earnings growth, and not just greater operational costs.
The latest market reaction implies Wall Street is less inclined to reward corporations for aggressive spending on AI without obvious benefits.
Losses for Alphabet and Tesla spilt into the broader market, with other big tech names falling over worries they could also ramp up AI spending when they report profits.
Investors are now looking out for upcoming results from other members of the so-called “Magnificent Seven”, like Meta, Microsoft, Apple and Amazon, for clues on how much they plan to spend on AI infrastructure over the next quarters.
Rising oil prices and worries about greater energy costs driving inflation also weighed on the overall market, adding another element of uncertainty for investors.
But while some analysts see the sell-off as a reflection of short-term concerns, not a change in the long-term AI story, others say tech companies will face more scrutiny over how efficiently they deploy capital.
Supporters of the AI investment strategy say spending now will build the groundwork for future development in cloud computing, self-driving cars and AI-powered consumer products.
But more cautious investors feel corporations should now demonstrate they can deliver measurable financial returns, rather than rely on anticipation of future technical advancements.
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