Tesla and Alphabet shares took a sharp hit as both companies announced increased spending on artificial intelligence initiatives, unsettling investors worried about the escalating costs associated with the AI boom. On Thursday, Tesla’s stock dropped 13%, while Alphabet’s shares fell over 7%, continuing declines after both firms closed lower the previous day. The market reactions followed second-quarter reports showing negative free cash flow for both companies and significant hikes in their capital expenditure forecasts.

Alphabet raised its 2026 capital expenditure outlook to between $195 billion and $205 billion, up from an earlier projection of $180 billion to $190 billion, and warned that spending may be even higher next year. Tesla disclosed a 142% year-over-year jump in second-quarter capex to $5.79 billion, aiming for over $25 billion for the full year. Tesla’s CEO Elon Musk highlighted investments in semiconductor production and the upcoming launch of their humanoid robot, Optimus, as key areas driving their expansion.

Despite investor concerns, there were notable positive developments amid the spending spree. Alphabet’s cloud revenue surged 82% year-over-year to $24.8 billion in Q2, with operating margins in that division improving to 35.6% from 20.7% a year earlier. This growth reflects some early returns on the company’s AI investments, signaling the potential for substantial long-term gains from its expanded infrastructure to meet rising demand.

Tesla’s core automotive segment also showed resilience, delivering $20.52 billion in revenue, a 23% increase compared to the prior year. While both management teams acknowledged the sizable spending in the short term, they expressed confidence that these investments will generate strong returns. The short-term market jitters underscore investor anxiety about AI-related capital spending, but analysts note the potential for these outlays to fuel future growth in the rapidly evolving technology landscape.