Alphabet (NASDAQ: GOOGL, GOOG) and Tesla Motors (NASDAQ: TSLA) saw their combined market value plummet by roughly $500 billion on Thursday after their latest quarterly reports signaled an intensification of investments in artificial intelligence. The steep sell-off, which erased about $300 billion from Alphabet’s valuation and $200 billion from Tesla Motors’, was driven by growing investor unease over ballooning capital expenditures and pressure on cash flows, raising doubts about when these AI bets will start paying off.
Tesla Motors shares tumbled 14.5%, their worst single-day drop since March 2025, while Alphabet slid 7.1%. The negative sentiment also dragged down Amazon (NASDAQ: AMZN), which lost 4.6% and roughly $120 billion in market cap.
Where to focus first
Both companies reported negative free cash flow in their second-quarter results alongside sharp increases in capital spending. Alphabet raised its 2026 capital expenditure forecast to $195-205 billion, up from an earlier range of $180-190 billion, and indicated that spending would climb further in 2027. The company attributed the increase to accelerating the build-out of AI infrastructure to meet surging computational demand, noting that existing capacity remains insufficient to support the rapid growth of its AI business.
Tesla Motors, meanwhile, reported a 142% year-over-year jump in second-quarter capital spending to $5.79 billion and projected 2026 full-year spending to exceed $25 billion. The company is pouring money into autonomous driving, AI computing, semiconductors, and the Optimus humanoid robot, with the first production line for Optimus already being installed and set to begin production soon.
Why only two major tech stocks?
Addressing market concerns, management at both companies emphasized that the heavy investment outlays would generate significant long-term rewards. Tesla CEO Elon Musk described this year as unprecedented in terms of capital expenditure, expressing confidence that all current investments will ultimately deliver strong returns—potentially the highest in the company’s history.
However, investors remain skeptical about the near-term profitability of these AI initiatives. Ben Barringer, head of technology research at Quilter Cheviot, noted that the market is increasingly focused on the rapid growth in capital spending and its impact on margins. He added that delays in the launch of Gemini 3.5 Pro and a lack of breakthrough AI products have raised questions about whether Alphabet’s massive AI investment is translating into a clear competitive advantage.
BNP Paribas analyst James Picariello pointed out that Tesla Motors is pursuing an extremely aggressive capital expenditure strategy to advance its AI agenda, but the path to commercializing its AI business remains highly uncertain. With market valuations already reflecting optimistic expectations, Picariello reiterated a “Sell” rating on the stock with a $280 price target.
Data shows that Tesla Motors trades at about 152 times forward earnings over the next 12 months, making it the most expensive stock among the so-called “Magnificent Seven” and the worst performer year-to-date. As of Thursday’s close, the stock has fallen nearly 30% in 2026.
The sharp decline has delivered significant profits to short sellers. According to Ihor Dusaniwsky, managing director at S3 Partners, Tesla Motors’ Thursday sell-off generated an estimated $4.3 billion in daily mark-to-market gains for short sellers, bringing their year-to-date paper profits to roughly $9.08 billion. About 3% of Tesla Motors’ outstanding shares are currently sold short, the highest proportion among the Magnificent Seven, compared to Meta Platforms at just 1.6%.
Concerns around Tesla Motors’ AI strategy differ from those surrounding other tech giants. While the debate for Alphabet and Microsoft centers on whether AI spending is too large and its payoff too distant, some Tesla Motors investors argue the company is not investing enough in AI businesses like Robotaxi and humanoid robots to achieve its long-term goals. Additionally, weaker-than-expected margins in its core automotive business have fueled worries about the company’s ability to sustainably fund its AI ambitions.
Despite the cautious sentiment, some institutional and retail investors are taking the opportunity to buy. Vanda Research data shows Tesla Motors was the most net-bought stock by U.S. retail investors on Thursday, with about $42 million in net purchases during the session. Morningstar analyst Seth Goldstein believes the current share price is below intrinsic value and maintains a $450 fair value target, noting that the pullback offers a favorable entry point for long-term investors.
On the positive side, Alphabet’s earnings report contained some encouraging signs. Google Cloud revenue surged 82% year-over-year to $24.8 billion in the second quarter, beating estimates, while its operating margin jumped to 35.6% from 20.7% a year ago. Alison Porter, a portfolio manager at Janus Henderson, called it one of Alphabet’s strongest revenue growth quarters in five years, adding that the robust cloud performance demonstrates that the company’s AI investments are beginning to deliver tangible results. She suggested this could help restore broader confidence in the returns from AI capital spending across the tech sector.
For Tesla Motors, second-quarter automotive revenue rose 23% year-over-year to $20.52 billion, but the continued expansion of AI, autonomous driving, and robotics investments exerted significant pressure on margins and cash flow, providing the main catalyst for the sharp stock decline.
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