The massive investment in AI raises market concerns, with Alphabet and Tesla's combined market value evaporating by approximately $500 billion

According to the Zhitong Finance APP, both Alphabet (GOOGL.US, GOOG.US) and Tesla (TSLA.US) have signaled further increases in artificial intelligence (AI) investments in their latest earnings reports. However, the rising capital expenditures and cash flow pressures have raised market concerns about the return cycle of AI investments, leading to significant declines in the stock prices of both companies on Thursday, with a combined market value evaporating by approximately $500 billion.

By the close of trading, Tesla plummeted 14.5%, marking its largest single-day drop since March 2025, with a market value reduction of about $200 billion; Google's parent company Alphabet fell 7.1%, losing approximately $300 billion in market value. Dragged down by the sentiment in the tech sector, Amazon (AMZN.US) also dropped 4.6% that day, reducing its market value by about $120 billion.

Both companies' previously released second-quarter earnings reports showed that free cash flow turned negative, while capital expenditures significantly increased.

Alphabet raised its 2026 capital expenditure forecast from the previous $180 billion to $190 billion to a new range of $195 billion to $205 billion, and it expects further increases in capital expenditures in 2027. The company stated that the increase in capital expenditures is primarily aimed at accelerating the construction of AI infrastructure to meet the growing demand for AI computing power, as the current computing capacity is still insufficient to meet the rapid growth in AI business demand.

Tesla reported that its second-quarter capital expenditures soared 142% year-on-year to $5.79 billion and expects total capital expenditures for 2026 to exceed $25 billion. The company continues to increase investments in areas such as autonomous driving, AI computing power, semiconductors, and humanoid robots like Optimus, with the first production line of Optimus already being installed and set to start production soon.

In response to market concerns, the management teams of both companies emphasized that large-scale investments will yield long-term returns.

Tesla CEO Elon Musk stated during the earnings call that this year is unprecedented in terms of the scale of the company's capital expenditures, and he believes that all current investments will ultimately yield substantial returns, potentially becoming the highest return round of capital investment in the company's history.

However, the market remains cautious about whether AI investments can quickly translate into profitability.

Ben Barringer, head of technology research at Quilter Cheviot, noted that investors are currently more focused on the rapid growth of capital expenditures and the pressure on profit margins, while the continued delays in the release of Gemini 3.5 Pro and the lack of breakthrough AI product launches have raised doubts about whether Alphabet's massive AI investments have created a significant competitive advantage.

BNP Paribas analyst James Picariello pointed out that Tesla is advancing its AI strategy with an extremely aggressive pace of capital expenditures, but there remains considerable uncertainty regarding the commercialization progress of the company's AI business, and the market valuation has fully reflected optimistic expectations. He reiterated a "sell" rating on Tesla stock and maintained a target price of $280.

Data shows that, based on the expected price-to-earnings ratio for the next 12 months, Tesla's current valuation is as high as 152 times, making it not only the highest-valued company among the "seven giants" of U.S. stocks but also the worst-performing member this year As of Thursday's close, Tesla's stock price has fallen nearly 30% since 2026.

The sharp decline in stock price has also provided substantial returns for investors shorting Tesla. According to Ihor Dusaniwsky, Managing Director at S3 Partners, Tesla's significant drop on Thursday is expected to yield about $4.3 billion in paper profits for short sellers in a single day, with a cumulative paper profit of approximately $9.08 billion this year. Currently, about 3% of Tesla's outstanding shares are sold short, making it the stock with the highest short ratio among the "Big Seven" U.S. stocks, while the second-ranked Meta Platforms (META.US) has a short ratio of only about 1.6%.

However, the controversy surrounding Tesla's AI strategy differs from that of other tech giants. For companies like Alphabet and Microsoft (MSFT.US), the market is concerned about the scale of AI investments being too large and the return cycle being too long; while some Tesla investors believe that the company's investments in AI businesses such as Robotaxi and humanoid robots are still insufficient to support its long-term development goals. At the same time, the automotive business's profit margins are below expectations, further raising concerns about whether the company's core business can continue to fund its future AI strategy.

Despite cautious market sentiment, some institutions and retail investors are choosing to go against the trend.

Data from Vanda Research shows that Tesla was still the stock with the highest net buying amount among U.S. retail investors on Thursday, with a net purchase of about $42 million during the day.

Meanwhile, Morningstar analyst Seth Goldstein believes that the current stock price is below the company's intrinsic value, and the long-term growth outlook remains robust, maintaining a fair value target price of $450. He stated that for long-term investors, this round of stock price correction actually provides a good opportunity for positioning.

On the other hand, Alphabet's earnings report still shows some positive signals. Google Cloud's revenue in the second quarter grew by 82% year-on-year to $24.8 billion, exceeding market expectations; the operating profit margin for this business also increased from 20.7% in the same period last year to 35.6%.

Janus Henderson portfolio manager Alison Porter stated that this is one of Alphabet's strongest revenue growth quarters in the past five years, and the significant increase in Google Cloud's revenue and profit margin also proves that the company's AI investments are beginning to yield actual returns. She believes this not only helps boost market confidence in overall AI capital expenditures but also reflects that large tech platforms are gradually realizing returns on their AI investments.

As for Tesla, its core automotive business saw revenue growth of 23% year-on-year to $20.52 billion in the second quarter, but the ongoing expansion of investments in AI, autonomous driving, and robotics continues to exert significant pressure on profit margins and cash flow, becoming the main trigger for this stock price drop