Technology shares ended a difficult week on Friday as investors continued to question the rising cost of artificial intelligence.
The biggest shock came on Thursday. The Nasdaq Composite fell 2.2% after Alphabet and Tesla released their latest results. Alphabet shares finished more than 7% lower, while Tesla dropped 14.5%. On Friday, the Nasdaq fell a further 0.6%, while the S&P 500 was nearly flat and the Dow Jones Industrial Average rose 0.5%.
Strong growth came with a much bigger bill
Alphabet reported quarterly revenue of about $119.8 billion, up 24% from a year earlier. Google Cloud revenue rose 82% to $24.8 billion, showing that demand for AI computing services remains strong.
However, the company also spent heavily on the data centers, servers and chips needed to support those services. Capital expenditure reached about $44.9 billion during the quarter. Alphabet raised its full-year capital spending forecast to between $195 billion and $205 billion, up from an earlier range of $180 billion to $190 billion.
Alphabet recorded negative free cash flow for the first time in its history, using $5.9 billion more cash than it generated after capital spending. The company expects capital expenditure to rise again in 2027.
Tesla faces a similar question
Tesla also showed how expensive the shift toward AI can be. The company reported second-quarter revenue of $28.24 billion, a 26% increase from a year earlier. Net income fell to $1.11 billion.
Research and development spending increased about 49% to $2.37 billion. Tesla is investing in robotaxis, AI computing infrastructure and its Optimus humanoid robot. The company said capital spending is expected to keep growing over the next two to three years.
Why investors are becoming cautious
The concern is not that demand for AI has disappeared. Alphabet’s cloud growth suggests the opposite. The concern is how long it will take for large investments to produce enough profit and cash to justify their cost.
Building AI services requires more than software. Companies need advanced processors, new data centers, networking equipment and reliable power. These projects can take years to complete, and they create ongoing costs such as maintenance and depreciation.
That changes the way investors assess large technology companies. For years, companies such as Google were prized for strong margins and large cash flows. The AI race is making their businesses more capital intensive.
What comes next
The issue will remain in focus next week. Microsoft, Meta and Amazon are due to report results, and investors will examine their AI spending plans as closely as their revenue growth.
The Federal Reserve also meets next week. Its view on inflation and interest rates could add another source of pressure for the market, especially if borrowing costs are expected to stay high.
For now, the market is sending a clear message. Investors still see opportunity in AI, but they want more evidence that record spending will lead to durable returns.
