The selloff in Alphabet shares is the latest indication that Wall Street's concerns about heavy artificial-intelligence spending are mounting, and it spells trouble for other tech companies as they report earnings.
Amazon, Microsoft, Meta and Alphabet are all dramatically raising their capital spending to build AI data centers. Investors are increasingly worried that the tech giants -- which are all highly profitable companies in their core businesses -- won't bring in enough new AI revenue to justify hundreds of billions in capex.
Alphabet stock was pummeled after it announced higher-then-expected capital spending, and its tech brethren could face more of the same in the coming weeks.
In the case of Alphabet, the Google parent company reported second-quarter financial results after the stock market closed Wednesday night. On the surface, the results for the quarter were solid as earnings and revenue came in above analyst estimates. Even more encouraging was Google Cloud's better-than-expected revenue growth.
Google Cloud is Alphabet's cloud computing and artificial-intelligence service that allows clients to rent server space. The cloud business has become increasingly important for it and the other tech giants as demand grows for the infrastructure needed to power AI.
Building out that infrastructure is incredibly expensive, though. Alphabet's capital spending for the quarter was $44.9 billion, a 101% rise from the same period last year.
Shareholders have wanted to see strong revenue growth in companies' cloud business for reassurance it justifies the heavy spending. Alphabet seemed to deliver on that count. Second-quarter Google Cloud revenue rose 82% from the prior year, far ahead of analyst estimates of 63% growth.
"Google Cloud growth of 82% y/y was pretty darn impressive -- it was over 20 points better than we modeled and about 700 basis points better than what even the bulls thought," Melius Research analyst Ben Reitzes wrote on Thursday. He rates Alphabet as a Hold with a $375 price target.
Alphabet stock dropped 7.1% to $317.69 and was the worst performing stock in the Dow Jones Industrial Average on Thursday. The index was off 507 points, or 1%.
Wall Street was taken aback by Alphabet's latest capital spending update. Management said on the earnings call Wednesday night that it now expects 2026 capex to be between $195 billion and $205 billion, compared with its prior guidance of $180 billion to $190 billion. This boost comes as the costs for components like memory -- the hardware needed to power AI -- become increasingly expensive as demand far outpaces supply.
The spending also isn't expected to slow down soon. Alphabet said it continues to expect capex to increase "significantly" in 2027.
Tesla, another member of the Magnificent Seven, reported on Wednesday night that its second-quarter capital spending rose to $5.8 billion, up 142% from a year ago. The electric car maker expects capex to increase further in the second half of 2026 as the company works through its own AI and robotics ambitions. Tesla stock fell 15% on Thursday.
It isn't just higher spending troubling shareholders. This spending is eating into free cash flow. Alphabet reported negative free cash flow for the quarter of $5.9 billion, driven by the investments in capex. Analysts now expect Alphabet to report third-quarter free cash flow of $452.7 million, significantly lower than estimates of $7.69 billion analysts had before last night's report.
"The market's reacting to not just the capex spend, but the free cash flow issue, and that spans across all the tech names," Nancy Tengler, CEO of Laffer Tengler Investments, wrote on Thursday.
Wall Street should expect to see more increases to spending estimates and hits to free cash flows in the coming earnings reports from Big Tech, with Meta Platforms, Microsoft, Amazon, and Apple all on deck to report next week.
"Capex investment continues to scale among the hyperscalers, as Google raised its 2026 capex spend guidance again, and continues to see material growth in 2027 as compute remains constrained, demand remains strong, and component pricing continues to increase," Wedbush analyst Ygal Arounian wrote on Thursday. "We expect to see similar trends with Amazon capex spend as well."
Investors should brace for other tech companies to take stock hits if they also boost capex estimates. Google's post-earnings stock hangover underscores that Wall Street isn't going to celebrate better-than-expected cloud growth as spending rises into the stratosphere.
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