Tesla and Google shares slump as heavy AI spending spooks investors

Following significant disclosures from industry leaders regarding their capital expenditure, a broader tech sell-off rippled across global exchanges, triggering the worst performance for the Nasdaq composite in nearly two months.

The downturn was ignited by Tesla and Google’s parent company, Alphabet, both of which faced intense scrutiny after reporting the financial impact of their heavy investments in emerging technologies. Investors, increasingly anxious that these outlays are yet to produce reliable profits, reacted by retreating from major technology holdings. The market sentiment was further dampened by rising oil prices, which have stoked fears of impending interest-rate hikes.

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Tesla faces margin pressure and policy shifts

Tesla endured one of its steepest single-day share price declines, with its stock falling more than 12pc. The company, led by Elon Musk, revealed a contraction in profits on Wednesday, despite an increase in vehicle sales compared to the previous year. The profit margin erosion was driven by substantial discounts applied to its vehicles and a decline in income generated from regulatory credits. The company also made less money from regulatory credits, which the electric-car maker sells to other manufacturers that fail to hit emissions targets. Donald Trump has cancelled electric-car subsidies and dismantled the regime that allowed Tesla to sell emissions credits.

As the electric-vehicle business comes under pressure, the company is spending billions on expanding production of its driverless Cybercab and Optimus robots, as well as grid batteries and solar panels. Regarding this strategy, Musk stated:

"This is the fastest industrial scale-up since World War II in America,"

. The market’s reaction to this strategy led to a decline of more than $50bn (£37.5bn) in the value of Musk’s 30pc stake in the company.

Alphabet’s unprecedented cash burn

Google's parent company, Alphabet, dropped by almost 7pc after it burned through billions in cash to fund its own AI spending. The company burned through $5.9bn of cash during the three months to June – the first time that cash flow had been negative in Google's two decades as a public company. The company’s chief financial officer, Anat Ashkenazi, told investors that capital expenditure would be between $195bn and $205bn this year. Much of it will be spent on AI data centres and the chips that run AI applications. This was up from a prior estimate of $180bn to $190bn, which itself was an increase on an earlier forecast of $175bn to $185bn.

Meanwhile, Google's parent company Alphabet warned investors that it could spend more than $200bn on AI this year, the second time it has raised forecasts. Ms Ashkenazi said the increase was to meet growing demand and that spending would jump again next year. Concerns have been heightened by the recent launch of Kimi K3, a cheaper Chinese AI that could rival US models.

Market contagion and investor sentiment

News of Google and Tesla's spending led to sell-offs at Amazon, Meta, Microsoft and Oracle, which are all making substantial AI investments.

What to watch next

• Interest Rate Outlook: Monitoring how oil price volatility influences central bank decisions on interest rates, which could further impact the cost of borrowing for capital-intensive firms.
• Regulatory Environment: Further shifts in industrial policy, particularly regarding electric vehicle incentives and subsidies, will dictate the pace of recovery for Tesla’s traditional revenue streams.
• Competitive Landscape: Observation of whether lower-cost international alternatives, such as Kimi K3, continue to erode the market share or valuation justifications for US-based models.