AI bill catches up with Wall Street: Tesla crashes 14%, Alphabet falls 7%

Wall Street's enthusiasm for artificial intelligence (AI) faced a reality check on Thursday as investors punished two of the world's biggest technology companies for spending billions of dollars on AI while burning through cash.Tesla shares plunged about 14%, while Alphabet, Google's parent company, fell around 7% after both companies reported quarterly results that highlighted the rising cost of the AI race. The sell-off dragged the broader market lower, with the Nasdaq Composite dropping about 2.2%, the S&P 500 falling 1.2% and the Dow Jones Industrial Average losing 1%.The sharp fall suggests that Wall Street is becoming less willing to reward heavy AI spending without clear evidence that those investments are generating profits.GOOGLE'S $205 BILLION AI BETAlphabet delivered a strong quarter on paper. The company reported revenue of $119.8 billion, beating Wall Street expectations of $116.9 billion, while Google Cloud revenue surged 82% to $24.8 billion as demand for AI computing continued to grow rapidly.However, investors looked beyond the strong revenue numbers after the company announced that it would raise its 2026 capital expenditure guidance to between $195 billion and $205 billion, up from its earlier estimate of $180 billion to $190 billion. Alphabet spent $44.9 billion on capital expenditure during the second quarter alone, nearly double what it spent a year earlier. Investors also reacted negatively after the company reported negative free cash flow, reflecting the enormous cost of building AI infrastructure.TESLA'S FIRST CASH BURN IN TWO YEARSTesla faced an even stronger market reaction.The electric vehicle maker's shares tumbled about 14% after reporting its first cash burn in two years, as spending on AI initiatives, Cybercab, the Optimus humanoid robot and other future technologies weighed heavily on profitability.Although Tesla's revenue rose 25.5% year-on-year to $28.24 billion, comfortably beating expectations, investors focused on weaker earnings and shrinking margins.Adjusted earnings fell to 33 cents per share, well below analysts' expectations of 50 cents.Operating expenses jumped 47%, driven by higher spending on AI, Cybercab, Optimus, Tesla Semi and stock-based compensation. As a result, operating income fell 57%, while operating margin narrowed sharply to just 1.4% from 4.1% a year earlier.Despite the weak profitability, Tesla continued to report strong operating metrics. Vehicle deliveries rose 25% to a record 480,126 units, while energy storage deployments increased 41% and Full Self-Driving subscriptions climbed 56% year-on-year.WALL STREET WANTS RETURNS, NOT JUST SPENDINGFor much of the past two years, investors rewarded technology companies for aggressively investing in AI, believing those investments would drive future growth.Now, the market appears to be asking a different question: when will those investments begin generating meaningful returns?Daniel Skelly, Head of Morgan Stanley's Wealth Management Market Research and Strategy Team, told Reuters that markets were already under pressure from the correction in semiconductor stocks and were now facing additional concerns over rising capital expenditure by the "Magnificent Seven" technology companies, along with higher oil prices and geopolitical uncertainty.He said long-term AI growth drivers remain intact, but markets could remain volatile if large technology companies struggle to convince investors that their massive AI investments will translate into sustained earnings growth.A SHIFT IN THE AI TRADEThe reaction to Alphabet and Tesla suggests investors are becoming more selective about the AI theme.Companies can no longer rely solely on strong revenue growth to satisfy Wall Street. Investors are now paying closer attention to cash flow, profitability, margins and how quickly AI investments begin contributing to earnings.The sell-off shows that Wall Street is still willing to reward companies with clear AI-led revenue growth, but is increasingly penalising businesses where spending is rising faster than near-term profit visibility.The latest results from Alphabet and Tesla may therefore mark an important shift in investor sentiment—from rewarding AI spending at any cost to demanding stronger financial returns from the billions being invested.- EndsPublished On: Jul 24, 2026 08:52 IST