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The past couple of weeks the market had been asking and concerning that the heavy AI capex may not be justified by earnings. Alphabet and Tesla, two of the largest AI-spending companies both released their earning reports on Wednesday. The answer turned out to be more interesting than a simple AI spending good or bad.
Alphabet's revenue came in at $119.8 billion beating estimates of $116.93 billion and up 24% yoy. Google Cloud accelerated from 63% growth last quarter to 82% this quarter, hitting $24.8 billion in revenue. Cloud operating margin jumped from 20.7% a year ago to 35.6%. The Cloud backlog hit $514 billion up more than $50 billion in a single quarter. By almost any normal measure, that's one of the best quarters a company this size has ever posted. The stock still fell 6-7% anyway. Management raised 2026 capex guidance again, to as much as $205 billion on top of the $85 billion equity raise back in June. Investors were not happy with Alphabet saying that it's going to spend even more, on top of already spending an enormous amount with no assurance the return shows up on the same year.
Tesla had a rough quarter. Revenue hit a record $28.24 billion, up 26% yoy and ahead of the $26.4 billion Wall Street expected, driven by a record 480,126 vehicles delivered. The stock dropped by 13%. Non-GAAP EPS was at $0.33 missing the $0.51-0.54 estimate by roughly 39%, down 18% from a year ago. GAAP gross margin slipped to 16.8%, operating income was down by 57% to just $398 million and operating margin fell from 4.1% to 1.4%, as regulatory credit income which had been running $700-900 million a quarter, mostly stopped and vehicle discounting effected the pricing.
This was Tesla's first cash burning quarter since early 2024 versus a $146 million surplus in the same quarter last year. Cash and investments are still at $43.5 billion, so there's no liquidity concern. Musk told analysts this is "maybe the best capex returns that we've ever seen," pointing to Optimus robot production about to start. He also floated deeper collaboration with SpaceX, mentioning a project called Terafab, massive semiconductor manufacturing project.
So Alphabet got sold for spending more on infrastructure that's working, Cloud growth accelerating and margins expanding are proof the money is converting into a real business. Tesla got sold for spending heavily on infrastructure and initiatives that haven't shown up as returns yet, while the core business (cars) is simultaneously showing real strain in cash generation and margins. Those are two different problems under the same AI capex.
Worth noting something else also, because it wasn't a clean day to report earnings. Oil hit one-month highs above $94 a barrel overnight on continued geopolitical issues and shipping disruption fears. The Dow fell 458 points, the S&P 1.2%, the Nasdaq 2.2%, and Alphabet and Tesla accounted for a huge part of that.
If we see in the past few weeks, Meta's cloud pivot, Amazon's bond raise, Nvidia's stake in Nebius, the whole industry is shifting toward financing AI buildouts through debt and equity instead of pure cash flow. Last night was the first time two mega-caps reported real numbers on the same evening and the market showed a clear distinction between spending that's converting and spending that isn't.
So two separate angles, for Alphabet, does punishing a company for raising guidance after posting 82% Cloud growth and expanding margins feel like the market being too impatient. And for Tesla, is Musk's "best capex returns we've ever seen" is correct given the negative FCF. And what does this mean for the broader AI capex concern of this industry.