Big Tech AI spending faces investor scrutiny after Alphabet selloff

Big tech AI spending is drawing sharper investor scrutiny after Alphabet lifted its capital expenditure outlook to as much as $205 billion and reported negative free cash flow for the second quarter, Bloomberg News reported. Shares in the Google parent fell 7% last week, even as the company reported an 82% increase in cloud computing revenue.

The reaction marked a change in tone around the largest US technology companies, whose shares had previously benefited from expectations that heavy investment in artificial intelligence would strengthen their competitive positions. Bloomberg reported that investors are now paying closer attention to the cost, financing and cash-flow effects of building AI infrastructure.

Jason Lemire, chief investment officer at Bold Wealth Partners, told Bloomberg that investors had become “obsessed” with capital expenditure and that the market preference had shifted from more spending to less. He cited capital raises, negative cash flows and higher debt as factors adding risk.

Why are investors worried about big tech AI spending?

Capital expenditure, or capex, is money companies spend on long-lived assets such as data centers, servers and chips. In AI, those outlays can be large because advanced models require substantial computing capacity, which can pressure free cash flow before the investments generate revenue at scale.

Alphabet has been regarded by investors as a leading AI beneficiary, Bloomberg noted, because of its Gemini services, internally developed data-center chips and growing cloud business. That made the selloff more significant for the broader sector, as it suggested that strong AI-linked revenue growth may no longer be enough to offset concern over rising investment demands.

The next tests for the market are earnings from Microsoft and Meta, scheduled for Wednesday, followed by Apple and Amazon the next day. Analyst estimates compiled by Bloomberg show Google, Amazon, Meta and Microsoft are expected to spend about $724 billion on capital projects this year and almost $950 billion in 2027.

Willy Lee, principal at venture firm Neostellar Capital, told Bloomberg that investors are in a period where they are inclined to sell shares on signs of higher capex. He said Microsoft, Meta and Amazon are also moving alongside Alphabet in committing large sums, which is likely to bring scrutiny across their businesses as spending continues.

Apple has taken a different approach, according to Bloomberg, avoiding the same scale of AI outlays and instead working with model developers. Its shares were up 15% in July and on course for their strongest month in three years, Bloomberg reported.

Apple has still been affected by AI-related cost pressures. Bloomberg reported that strong demand for memory chips used in AI computing has pushed the company to raise prices on products including MacBooks and iPads.

PYMNTS, writing on Google’s earnings, said search remains the clearest test of whether Alphabet can turn generative AI into support for its core business. Search and other revenue rose 17% to $63.3 billion, while AI Overviews and AI Mode are becoming parts of a single search experience.

Alphabet Chief Executive Sundar Pichai said users are submitting longer and more complex questions, and that Google is seeing growth in total queries as people use AI features for searches they may not previously have made.

This story draws on original reporting from PYMNTS.