AI’s Billion-Dollar Arms Race: Google And Tesla Open Their Wallets
Source: The Information Briefing, Martin Peers
Photo: Chat GPT
Wow. Google Cloud’s business exploded in the second quarter, with revenue soaring 82%, nearly 20 percentage points faster than for the previous quarter. Rapid demand for AI services—and in this quarter, the impact of AI chip sales—has lifted Google Cloud’s growth rate by nearly 50 percentage points in the past four quarters.
But while cloud’s red-hot growth lifted Google’s parent Alphabet to a better than expected 24% top-line expansion in the second quarter, the mounting costs of Google’s AI expansion are becoming more evident. Alphabet burned cash in the quarter, as capital expenditures of about $45 billion offset $39 billion in cash from operating activities. Google has been a cash machine almost since its founding, so burning cash is an unusual experience for the company. Investors showed their distaste by selling Google stock down 4% in after-hours trading.
Chief Financial Officer Anat Ashkenazi told analysts that the company’s “free cash flow will remain under pressure,” which suggests this won’t be the last quarter the company reports cash burn. She also raised Google’s projection for capex, to between $195 billion to $205 billion for 2026, up from a range of $180 billion to $190 billion, the second time in two quarters Google has raised the capex projection. Analysts estimate Google’s cash from operations will total $212 billion this year, according to S&P Global Market Intelligence. That means free cash flow could be as low as $7 billion for the year. (For the first half, it was $4.26 billion.)
Cost pressures showed up elsewhere. For instance, the company’s workforce expanded to a record high of about 199,000, up 4% so far this year. Alphabet’s operating profit margin dipped 2 percentage points to 34% from the first quarter. Since the start of 2024, the operating profit margin has only improved a couple of percentage points, despite sharply higher margins at Google Cloud and an improvement at Google’s ad businesses over the same period. One reason is sharply rising costs at Google DeepMind, the company’s AI lab, which are reported as a cost center separate from Google’s main businesses.
The good news is that Google’s search ad revenue remains strong from a long-term perspective, although its second-quarter growth rate of 16.8% was down a bit from its robust expansion of 19% in the first quarter. Google is introducing new ad formats to AI Mode in search, so search’s ad growth is worth watching closely. Search, after all, remains the cash cow: Its revenue of $63 billion in the quarter dwarfed Google Cloud’s revenue of $24.7 billion.
Tesla’s Big Spending Year
Guess who else is splurging on capex? Yes, Elon Musk at Tesla. The electric vehicle maker—which wants to be a robot and robotaxi car maker when it grows up—reported capex of $5.8 billion for the June quarter, about a billion dollars more than it spent in the previous two quarters combined.
As a result, the company burned about $1 billion in the quarter. And more is to come. Musk told analysts, “This is a massive Capex year.” The company is ramping up its factories to start production of its Optimus robot, among other things. The spending overshadowed Tesla’s report that revenue grew 26%, reflecting that sales of its vehicles are bouncing back. Musk, though, is no longer focused on selling cars.
He may be focused more on ways of combining Tesla with his other baby, SpaceX. At least, that’s one conclusion from how he responded to an analyst question on Wednesday night about such a merger. “Obviously, we can’t talk about combining companies,” Musk said, while acknowledging that “there’s more and more overlap” between the two companies. Hmmm.
In Other News
• Enterprise software firm ServiceNow’s second-quarter revenue growth accelerated a couple of percentage points to 24%, the company reported Wednesday, thanks in part to strong demand from the federal government that pulled some business into the second quarter from the third quarter.
• Amazon cut staff today from the division working on building its own large language models, the company said. A spokesperson said that while AI models “remain one of the most important things we’re working on…we’re sharpening our focus on the initiatives that matter most for customers, so we can move faster on what counts.”
• Cursor is preparing to release a model router as soon as Wednesday, according to a draft of a company announcement viewed by The Information.
• Advanced Micro Devices said Wednesday it would make an equity investment of “up to $5 billion” in Anthropic “in the future,” and the Claude AI maker would use AMD’s AI server chips starting next year. Anthropic has been steadily diversifying its AI server sources and is evaluating chips from other providers including startups and Microsoft, The Information has reported.
• Enterprise software firm Monday.com said Wednesday it plans to cut 20% of its workforce in the second half of this year to “support a leaner, more focused operational model” as it continues to invest in AI.
• Adam Benjamin, Fidelity Management’s longtime semiconductor fund manager, is joining Michael Dell’s family office, DFO Management, according to people familiar with his move.
• IBM on Wednesday said it was reducing its full-year projection for revenue growth to between 4% and 5% this year compared to an earlier forecast of more than 5% growth.