Google burning through cash with spiralling AI costs

Shares of Google and Tesla plunged on Thursday as investors were spooked by the ever-increasing amounts of money being spent on artificial intelligence (AI).

Google's parent company Alphabet saw its share price drop by more than 7%, while Elon Musk's electric vehicle-maker Tesla saw its stock fall 13.5%.

Both reported negative free cash flow - the money retained after paying for operations and investments - in financial results on Wednesday, alongside promises to spend billions more in the months and years to come.

It was the first time Google had seen the cash metric turn negative since it became a public company in 2004, according to its financial records.

As major tech companies race to capitalize on a new wave of AI technology, investors are wondering when financial benefits will show up.

Alphabet now expects to spend as much as $205bn this year, mainly on AI projects and infrastructure, a $15bn increase from a spending estimate it gave just three months ago.

Meanwhile, Tesla expects this year to spend up to $25bn on unspecified projects.

"There is still a healthy degree of scepticism about the ability of these investments to generate a commensurate level of return," Russ Mould, an investment director at AJ Bell, said.

Alphabet's combined quarterly revenue hit $119.8bn, up 23% compared with the same period last year.

Though Google parent Alphabet saw its business continue to grow in recent months, heavy spending on artificial intelligence (AI) infrastructure pushed its leftover cash into negative territory.

The company's free cash flow came in at negative $5.9bn (£4.3bn) for the first time in at least a decade, according to its past financial records.

Its stock quickly fell 4% in after-hours trading.

Anat Ashkanazi, Google's chief financial officer, noted on a call with financial analysts that the company had recorded negative free cash flow due to growing capital expenditures, essentially all of which were related to AI spending.

She said the company spent $45bn in the second quarter, with 60% of the cost going towards servers and the remaining 40% going towards data centres.

Alphabet's capital spending was $36bn in the first quarter of this year.

Ashkanazi said on the call that when it comes to AI, "the demand still outpaces that investment".

"As long as we see these attractive opportunities to invest, we will continue to invest."

Sundar Pichai, Google's chief executive, said the technological shift to AI tools and capabilities still "feels like early innings in a shift across multiple areas" and the company's plans around generating financial returns on its spending were "disciplined".

"What I see with what you can do with frontier capabilities, there is still a lot of work left to do to translate that into experiences for our users. So that looks like extraordinary opportunities with extraordinary returns."

Rachel Winter, a partner at the wealth management firm Killik & Co, said there was some surprise among investors about how much Google was spending.

"These are huge numbers. The fact that the shares dropped when the results came out, that suggests there is a little bit of concern about those levels."

Tesla reported negative free cash flow on Wednesday of $1.1bn for the second quarter due to its own increasing investment costs.

It was the company's first negative showing of leftover cash in two years, according to its financial records.

Tesla's plans to spend $25bn this year is more than double its capital spending in 2025.

Vaibhav Taneja, Tesla's chief financial officer, said on Wednesday that Tesla was in "a big investment cycle" and its spending would probably increase further over the next three years.

Related topics

More on this story