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Alphabet, Tesla Shares Drop as Analysts Warn of Pressures to Free Cash Flow Amid Ballooning CapEx

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Alphabet, Tesla Shares Drop as Analysts Warn of Pressures to Free Cash Flow Amid Ballooning CapEx

Alphabet (GOOG, GOOGL) and Tesla (TSLA) shares were slumping Thursday after the technology giants indicated rising artificial intelligence capital spending that analysts said could drive a bigger cash burn than previously projected.

Tesla's stock tumbled 14% in late-afternoon trade, while Alphabet's class A and C shares were down 7% each.

Alphabet raised its 2026 CapEx outlook to between $195 billion and $205 billion from its previous range of $180 billion to $190 billion to accelerate capacity delivery in a bid "to meet growing demand," Chief Financial Officer Anat Ashkenazi said during the earnings call late Wednesday, according to a transcript posted on the company's website. The Google parent expects CapEx to increase "significantly" next year, Ashkenazi said.

The company reported a negative free cash flow of $5.9 billion in the second quarter. "We expect the (FCF) will remain under pressure, driven by our investments in technical infrastructure, which enables us to capitalize on the AI opportunity and continue to drive attractive returns," Ashkenazi added.

Wedbush Securities raised Alphabet's CapEx forecasts for 2026 and 2027, driving its FCF estimates for both years into negative territory.

"We continue to expect revenue to catch up and an inflection back to positive FCF in 2028, driven by Alphabet's full stack positioning and its ability to monetize the upfront investment," Wedbush analysts Ygal Arounian and Chase Tohanczyn said in a note to clients Thursday.

The brokerage kept an outperform rating on the Alphabet stock with a $445 price target and added the company to its "Best Ideas List."

Separately, Tesla said late Wednesday its CapEx for the first six months of the year grew to $8.28 billion from $3.89 billion a year earlier. The electric vehicle manufacturer expects full-year capital expenses to cross $25 billion due to investments in compute infrastructure and data centers, higher spending on manufacturing facilities, and its AI-enabled operational assets, according to a regulatory filing.

"This is a massive CapEx year, but I'm confident that all the things that we're investing in are -- will yield incredible returns, really the best CapEx returns that we've ever seen," Tesla Chief Executive Elon Musk said on an earnings call, according to a FactSet transcript. The company reported second-quarter FCF of negative $1.09 billion.

"We view Tesla's accelerating CapEx cycle as a necessary investment to secure leadership in autonomy and robotics," Morgan Stanley said in a note e-mailed Thursday. "However, these investments push FCF further into negative territory, increasing focus on tangible Robotaxi (and) Optimus milestones."

The brokerage reduced its price target on the Tesla stock to $400 from $417, reflecting growing CapEx and "worsening cash burn through the end of the decade," according to the note. Morgan Stanley projects a FCF burn of about $14 billion next year, compared with its previous outlook of $5 billion.

Price: $318.86, Change: $-23.06, Percent Change: -6.74%

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