Alphabet's stock fell nearly 5% in after-hours trading immediately following its second-quarter earnings report, despite exceeding market expectations for both revenue and profit. Analysts suggest that the significant capital investments in AI have fueled concerns about a potential AI bubble.
On July 23, the tech giant's shares dropped 1.46% during regular trading and fell as much as 4.9% in after-hours trading before settling at a 2% decline.
The sharp decline occurred not immediately after the earnings announcement but during the earnings call when Chief Financial Officer Ruth Porat confirmed an increase in capital expenditure guidance. Alphabet raised its capital expenditure forecast for the year from $180 billion to $190 billion to a new range of $195 billion to $205 billion.
This new guidance exceeds Wall Street's expectations of $186 billion, and the company indicated that capital investments would continue to rise significantly in 2027. In the second quarter alone, capital expenditures reached $44.9 billion, doubling from $22.4 billion in the same period last year.
The impact of this investment surge is evident in the company's cash flow. Alphabet reported a negative free cash flow of $5.9 billion for the second quarter, marking its first quarterly deficit since going public in 2004. Although the company generated $39.1 billion from operations, capital expenditures surpassed this amount.
To address the cash shortfall, Alphabet raised $49.6 billion through common and mandatory convertible preferred stock offerings and $20.3 billion through bond issuance, halting its stock buyback program. Even the world's largest cash-generating company is now facing challenges in funding its AI investments with its own cash.
Attention is now shifting to upcoming earnings reports from other tech giants. Intel is set to release its results after the market closes on July 23, followed by Microsoft and Meta on July 29, coinciding with the Federal Open Market Committee's interest rate decision. Apple and Amazon will report their earnings on July 30. Amazon's revenue is expected to be around $196 billion, while Apple's is projected at approximately $108.9 billion; however, the key focus will be on their capital expenditure guidance.
Meta has already raised its guidance for the year to between $125 billion and $145 billion, while Microsoft's capital expenditure consensus for fiscal year 2027 has surged to $130 billion, doubling from $65 billion in fiscal year 2025. The combined AI capital investments of Amazon, Google, Meta, and Microsoft are projected to reach about $725 billion this year, a 77% increase from the previous year. Whether these companies maintain or raise their guidance could either bolster or deflate concerns about an AI bubble.
Wall Street analysts predict that the pace of spending growth may outstrip revenue growth, potentially causing the free cash flow of major U.S. tech companies to decline by as much as 90% this year. According to Moody's, unactivated data center lease agreements contracted by hyperscalers amount to approximately $662 billion, suggesting that reported capital expenditure figures may underestimate the actual burden. This concern aligns with the Federal Reserve's identification of AI as a systemic risk factor.
Additionally, developments from China have intensified bubble concerns. The recent unveiling of the open model 'Kimi K3' by Moonshot AI on July 17 has raised fears that the substantial investments made to secure U.S. AI dominance could be undermined by low-cost open-source alternatives. As a result, the Philadelphia Semiconductor Index plummeted 10% last week, falling more than 20% from its peak.
Upcoming initial public offerings (IPOs) from major companies like SpaceX, OpenAI, and Anthropic, scheduled for the second half of the year, also present uncertainties. The combined target market capitalization of these three companies is estimated at $3.5 trillion, which could create supply pressures in the market.
* This article has been translated by AI.
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