Tesla and Alphabet shares drop as investors worry about escalating AI spending

Shares of Alphabet and Tesla took a beating Thursday after the tech giants said they would ramp up their already breakneck pace of artificial intelligence spending.

Tesla and Alphabet shares fell sharply after their latest quarterly results, as investors looked past strong revenue growth and focused on weaker margins, missed profit estimates and rising artificial intelligence spending.Tesla shares dropped 14% after the electric vehicle maker reported second-quarter adjusted earnings of 33 cents per share, down 17.5% from a year earlier. The number missed the Zacks Consensus Estimate of 50 cents by 34%.Revenue rose 25.5% year-on-year to $28.24 billion, ahead of the consensus estimate of $25.81 billion. The company was helped by record second-quarter vehicle deliveries and growth in its energy and services businesses.Tesla delivered 480,126 vehicles during the quarter, up 25% from a year earlier. Production rose 10% to 451,758 vehicles. Model 3 and Model Y deliveries increased 25% to 467,762 units, while deliveries of other models rose 19% to 12,364 vehicles.Automotive revenue rose 23% to $20.52 billion. Automotive sales increased to $20.01 billion from $15.79 billion, though leasing revenue fell to $364 million from $435 million. Regulatory credit revenue dropped sharply to $146 million from $439 million.Energy generation and storage revenue rose 13% to $3.14 billion. Services and other revenue jumped 50% to $4.58 billion, helped by used vehicles, Supercharging, service centres and insurance.But the market focused on profitability. Gross profit rose 23% to $4.75 billion, while gross margin narrowed to 16.8%. Operating expenses surged 47% to $4.35 billion, led by spending on AI, Cybercab, Optimus and Tesla Semi, along with higher stock-based compensation and sales costs.Operating income fell 57% to $398 million. Operating margin declined to 1.4% from 4.1% a year earlier.Tesla’s software and energy metrics remained strong. Active paid Full Self-Driving subscriptions rose 56% year-on-year to 1.48 million. More than 55% of North American deliveries included an FSD subscription at purchase. Energy storage deployments rose 41% to 13.5 GWh.Also Read: Brent crude oil price surges past $100 as Houthi tanker attacks in Red Sea rattle marketsAlphabet also came under pressure despite reporting a strong quarter. Shares fell more than 6% after the Google parent raised its capital expenditure guidance, adding to investor concerns about the cost of the AI buildout.Alphabet reported revenue of $119.8 billion, up 24% year-on-year and ahead of Wall Street’s estimate of $116.5 billion. Google Cloud revenue rose 82% to $24.8 billion, beating expectations of $22.4 billion. Operating margin expanded to 34%.Still, investors reacted negatively after the company raised its 2026 capital expenditure guidance to $195 billion-$205 billion from the earlier range of $180 billion-$190 billion. Alphabet spent $44.9 billion on capex in the second quarter, double the amount spent in the same period last year.The reaction to both stocks shows the market’s changing test for large technology companies. Strong revenue growth is no longer enough when investors are worried about the cost of AI, pressure on margins and the time it will take for new investments to produce returns.For Tesla, the issue was the earnings miss and margin contraction despite record deliveries. For Alphabet, the concern was whether heavy AI and cloud infrastructure spending will keep rising faster than investors expected.The selloff also shows that Wall Street is becoming more selective in the AI trade. Investors are still rewarding companies that can show clear AI-led revenue growth, but they are punishing those where spending is rising faster than near-term profit visibility.

Both Tesla and Alphabet signaled higher spending as they invest in artificial intelligence.