Shares of Google and Tesla plunged on Thursday as investors were spooked by the ever-increasing amounts of money being spent on artificial intelligence. Google’s parent company Alphabet saw its stock drop nearly 7%, while Tesla fell 14.5%. The rout came after both reported negative free cash flow – the money retained after paying for operations and investments – in their latest financial results, alongside promises to spend billions more.
For Google, it was the first time its cash metric had turned negative since it became a public company in 2004. Alphabet now expects to spend as much as $205bn this year, mainly on AI projects and infrastructure – a $15bn increase from an estimate it gave just three months ago. Tesla, meanwhile, expects to spend up to $25bn on unspecified projects.
“Google and Tesla shares fell sharply as investors worry about billions spent on AI without clear returns.”
“There is still a healthy degree of scepticism about the ability of these investments to generate a commensurate level of return,” said Russ Mould, an investment director at AJ Bell.
Alphabet’s combined quarterly revenue hit $119.8bn, up 23% compared with the same period last year, but heavy AI spending pushed its free cash flow to negative $5.9bn (£4.3bn) for the first time in at least a decade. Its stock quickly fell 4% in after-hours trading.
Anat Ashkanazi, Google’s chief financial officer, told analysts the company recorded negative free cash flow due to growing capital expenditures, essentially all of which were related to AI. She said it spent $45bn in the second quarter, with 60% of the cost going towards servers and the remaining 40% towards data centres. “The demand still outpaces that investment,” she said. “As long as we see these attractive opportunities to invest, we will continue to invest.”
Sundar Pichai, Google’s chief executive, described the technological shift to AI tools as “early innings in a shift across multiple areas” and said the company’s plans around generating financial returns on its spending were “disciplined”. He added: “What I see with what you can do with frontier capabilities, there is still a lot of work left to do to translate that into experiences for our users.”