Alphabet delivered second-quarter results that beat Wall Street expectations on revenue and earnings per share — but investors punished the stock anyway, sending shares down nearly 7% on Wednesday. The culprit: the staggering cost of the AI arms race.

The Numbers

Alphabet reported Q2 revenue of $119.8 billion, up 23% year-over-year. Earnings per share also topped analyst forecasts. But the headline-grabbing figure was capital expenditures: $44.9 billion in Q2 alone — double the same quarter last year — with 60% going to servers and 40% to data centers.

The company raised its 2026 full-year capex guidance to between $195 billion and $205 billion, up from $180-$190 billion just three months ago. Wall Street had been expecting $187.1 billion.

More startling: Alphabet posted negative free cash flow of $5.9 billion — the first time the cash metric has turned negative since Google went public in 2004. CFO Anat Ashkanazi indicated the trend would continue as the company deepens AI investments.

The Market Reaction

Alphabet's stock fell 4% in after-hours trading immediately following the report, and the decline accelerated to nearly 7% the next day. Tesla, which reported its own results on the same day, fared even worse — shares plunged 14.5% after posting $1.1 billion in negative free cash flow, its first negative quarter in two years.

The selloff reflects a growing unease among investors about Big Tech's AI spending trajectory. Together, the four hyperscalers (Alphabet, Amazon, Microsoft, Meta) are expected to spend more than $725 billion on AI infrastructure in 2026.

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

The Defense

On the earnings call, CEO Sundar Pichai defended the spending, describing AI as still in its "early innings." "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," he said. "That looks like extraordinary opportunities with extraordinary returns."

CFO Anat Ashkanazi noted that "the demand still outpaces that investment," and as long as attractive opportunities exist, the company will continue to invest.

A Silver Lining

Alphabet's net income gain was overwhelmingly boosted by a $99 billion unrealized investment gain on equity securities — the company was an early investor in SpaceX back in 2015. Cloud revenue continued its strong growth trajectory.

But the bottom line for investors: the numbers were good, but not spectacular enough to ease worries about how all this AI spending will ultimately work out. Alphabet's operating margin rose to 34% year-over-year but fell from Q1, doing little to calm concerns about AI investment profitability.

As one analyst put it: the market is no longer willing to give Big Tech a blank check for AI.

Sources