- Lead. Alphabet fell 7.1% and Tesla tumbled in after-hours trading on Wednesday after both companies reported Q2 results that highlighted surging AI investment costs without delivering the margin improvements markets had priced in.
- Fact. Tesla’s gross margin fell to 16.8%—against an analyst consensus of 19.4%—while the company posted negative free cash flow for the first time in more than two years, with operating expenses climbing 47% year-on-year to $4.35 billion.
- Stake. The results dragged the S&P 500 down 1.2% and the Nasdaq 100 down 1.9% on Thursday, with Micron, AMD, Intel, and Broadcom each shedding more than 5%—raising questions about whether the AI capital expenditure cycle has outrun near-term profitability.
The first major wave of Magnificent Seven earnings arrived on Wednesday evening with results that tested investor patience on AI spending. Alphabet and Tesla both reported second-quarter figures after the close, and both delivered numbers that deepened anxiety about the pace at which massive AI investment converts into profit, according to Yahoo Finance earnings coverage.
Alphabet: Cloud Beat, Capex Shock
Google’s cloud revenue jumped 82% to $24.8 billion in Q2, beating analyst forecasts and underscoring the AI boom driving demand for enterprise compute. But the headline figure that set the tone was Alphabet’s capital expenditure projection: the company disclosed plans to spend up to $205 billion this year, primarily on data centres, chips, and computing equipment. Alphabet shares fell 7.1% in extended trading as investors weighed whether cloud revenue growth could justify spending at that scale within a foreseeable timeframe.
Tesla: Margins Fall, Free Cash Flow Turns Negative
Tesla’s automotive segment generated $20.52 billion in Q2 revenue, a 23% year-on-year increase. But profitability told a different story. Gross margin slid to 16.8% from 17.2% a year ago, well below the 19.4% analyst consensus, as average selling prices declined and regulatory credit revenue contracted. Operating margin fell to 1.4% from 4.1% a year earlier. Operating expenses climbed 47% to $4.35 billion, reflecting accelerated spending on AI, battery technology, robotaxi development, and next-generation manufacturing. The company reported negative free cash flow—its first such quarter in more than two years.
Chip Stocks Lead the Broader Rout
The earnings-driven anxiety spread across the technology sector on Thursday. The S&P 500 fell 1.2%—its biggest single-day drop in a month—while the Nasdaq 100 shed 1.9% in what Bloomberg described as the gauge’s worst session since the tariff-driven rout of April 2025. Semiconductor stocks bore the brunt: Micron Technology, Advanced Micro Devices, Intel, and Broadcom each lost more than 5%.
The selloff reflected a broader investor question: if two of the AI cycle’s most prominent companies—one a cloud infrastructure provider, one a consumer AI pioneer—are both struggling to translate AI investment into visible returns, how long before the market reprices the entire sector’s valuation premium.
Earlier this month, TSMC reported a 36% revenue surge driven by AI chip demand, signalling that the foundry and infrastructure layer of the AI supply chain is still thriving—even as the companies placing the biggest AI bets face rising scrutiny on returns.