Accelerated spending on artificial intelligence has drained free cash flow at Alphabet, Google's parent company, for the first time in over a decade, despite continued revenue and business growth, signaling the hefty cost of the tech industry's race to build AI infrastructure.

The company's free cash flow recorded a deficit of $5.9 billion in the second quarter, its first negative reading for this metric in at least ten years, after a significant increase in capital expenditure.

In contrast, combined quarterly revenue rose to $119.8 billion, up 23% from the same period last year, but investors focused on rising expenses, pushing the company's stock down about 4% in after-hours trading.

Google CFO Anat Ashkenazi said free cash flow was directly impacted by capital spending related to AI, noting that the company spent $45 billion in the second quarter, with 60% allocated to servers and 40% to data centers.

Alphabet had spent $36 billion in the first quarter, while raising its capital expenditure forecast for 2026 to between $195 billion and $205 billion, compared with previous estimates of $180 billion to $190 billion.

Ashkenazi confirmed that demand for AI services still exceeds current investment levels, adding, 'As long as attractive investment opportunities continue, we will keep spending.'

CEO Sundar Pichai said the shift toward AI is still in its early stages, considering that the company sees great opportunities for future returns from these investments, but it continues to execute them with financial discipline.

He added that developing advanced AI capabilities still requires a lot of work to transform them into products and experiences used by customers on a large scale.

The pressure is not limited to Google; Tesla also reported negative free cash flow of $1.1 billion in the second quarter, its first such reading in two years, due to a sharp increase in investment spending.

Tesla CFO Vaibhav Taneja said the company plans to spend up to $25 billion this year, more than double its capital expenditure in 2025, noting that Tesla is currently in a 'major investment cycle' expected to continue over the next three years.

Tesla's stock also fell about 4% in after-hours trading, amid continued investor concerns about the impact of massive spending on cash flows, despite major bets on future growth driven by AI.

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