Tesla and Alphabet results round up

The market has been waiting for tech earnings season to get some much-needed direction. However, the bulls are set to be disappointed. In after-market trading Tesla and Alphabet have seen their share prices sink more than 4% each, on the back of their Q2 earnings reports.

Google’s cloud business soars but capex plans spook investors

So, why is the market disappointed? Looking at Alphabet first, the company reported better than expected earnings. Revenues came in at $119.80bn last quarter, beating expectations of $116.93bn. Search revenue jumped by 17% and Google’s cloud revenue jumped 82% to $24.8bn. These are strong numbers; however, investors have been spooked by another increase in its capex spending for this year. The previous top estimate was $195bn, this has now been revised higher to $205bn.

The company said that it had increased its capex spend estimate due to an increase in demand for its AI services, which means the company has to accelerate its plans. However, the market is not buying it. The company said that it would only keep investing if the return looks attractive. This sounds good, but in the same earnings call, the company also noted that the Q3 comparisons with a year ago might not look as attractive, due to an increase in performance in Q3 2025.

Search revenues slow

Search revenue for Q2 came in slightly below analyst estimates,  at $63.3bn, which may lead some to ponder how Google’s core businesses can fund its AI largesse. Hence the unfavorable initial reaction to this earnings report.

Is AI paying off for Google?

But is AI paying off for Alphabet? Google cloud revenue continues to expand at a robust annual pace, and it also touted 2.4 million weekly active users for its AI coding tool called Antigravity. This is a subscription service, with prices ranging from $19.99 per month to $99.99 for the Google AI Ultra subscription. However, the company did not say how many of the 2.4 million weekly users are paying subscribers, which is adding to some investor scepticism.

Added to this, Google’s AI coding tool is less popular than other services on the market, including OpenAI’s Codex tool and the newly announced ChatGPT Work agent, which has 10 million weekly users.

Ahead of this earnings release, Cloud revenue was key, however, analysts are also looking closely at the return on AI investment. Alphabet reported a revenue increase of 24% however, total cost and expenses are also rising at a rapid 21% rate. Google is expanding its AI capability at such a fast rate that it is having to use 3^rd party compute vendors like Neoclouds. With demand for compute exploding, you can bet that 3^rd party providers will be charging hand over fist for their services, which may also weigh on investor sentiment towards Google in the coming days.

Semiconductor trade could make a comeback

The bigger picture suggests that all the fear in the semiconductor market is overdone, Google, and we assume the rest of the hyperscalers, will boost capex spend for the rest of this year, and a large portion of that spend will flow towards semiconductor stocks and memory chips. Thus, even if Google’s share price remains subdued this week, we could see a major rebound in the chip stocks, which should boost US stock indices as we move towards the end of the week.

Tesla disappoints

Tesla also reported earnings this evening. It reported weaker than expected earnings for last quarter, revenue was $28.24bn, beating estimates of $25.71bn, however, earnings per share missed estimates and came in at $0.33, vs. estimates of $0.51.

Although revenues are rising at a robust pace compared to a year ago, profits fell 5% and its gross margin also dropped, as the average selling price per vehicle fell, and regulatory credit revenue was also lower than a year ago. Gross margin fell to 16.8%, down from 17.2% a year ago, and well short of analyst estimates which were 19.4%.

Spending increases, as selling prices decline

While Tesla reported record vehicle deliveries last quarter, it managed to achieve this feat by cutting the price of the Model 3 and the Model Y. Operating expenses also increased sharply, as the company continues to ramp up production of the Robotaxi. The company also repurposed old factory lines in California to produce Optimus, the humanoid robot. Optimus has been touted as a babysitter, factory worker and is also expected to possess surgical capabilities. While getting Optimus to production stage is welcomed, there is a huge uphill battle ahead to get them to market. Regulatory issues and persuading a sceptical consumer, are just some of the issues Elon Musk will face in future.

Negative free cash flow leads to questions about the financial strength of Tesla, SpaceX

Although its diver-less technology subscriptions surged 56%, the company is still burning through cash, and free cash flow turned negative last quarter. The company swung from $1.44bn in free cash flow last quarter to a deficit of $1.1bn last quarter. Elon Musk’s ‘vision’ for the future of Tesla costs huge sums of money, and investors are losing patience.

These results come on the back of a bruising month for Tesla and SpaceX. Tesla’s share price has lost 18% so far this year, while SpaceX’s share price is down 26% in the past month. With SpaceX also likely to be burning through cash this year, investors are cooling towards Musk’s companies as legitimate questions  about the strength of their balance sheets rise to the surface.

AI trade remains on shaky ground

Overall, we think that Google’s results will have a bigger impact on markets on Thursday, but the fact that investors have sold both shares on the back of these results, this suggests that the AI trade remains on shaky ground.