Alphabet and Tesla shares dropped in after-hours trading Wednesday despite beating revenue expectations, as investors balked at the companies' massive AI infrastructure spending plans.

Alphabet forecast capital expenditures of $195 billion to $205 billion for 2026, up from prior guidance of $180 billion to $190 billion. Tesla reiterated expectations for more than $25 billion in capex this year, representing 200% year-over-year growth.

Both companies reported negative free cash flow for the second quarter. Tesla posted a $1.1 billion deficit after generating $146 million in free cash flow a year earlier. Alphabet's parent company warned investors to prepare for even higher spending in 2027.

Why the spending surge matters

The earnings reports signal a potential shift in investor sentiment toward AI infrastructure investments. Tesla shares fell 4% after hours while Alphabet dropped more than 3%, despite both companies exceeding revenue forecasts.

Google's cloud revenue jumped 82% year-over-year, driven by accelerating usage of its Gemini model. The company is building data centers packed with advanced chips to provide computing power for AI models and services.

Tesla is retooling factories to manufacture the two-seater Cybercab and Optimus humanoid robots while preparing to build an AI chip-manufacturing plant in Texas. CEO Elon Musk said the company should spend "as fast as we can spend" on capital expenditures.

"We should be spending on capex as fast as we can spend, as fast as we can without it being too wasteful," Musk said on the earnings call. "It's ok to be a little less capital efficient if we get things done sooner."

The results come as cheaper open-source models from China and signs of corporate frugality around AI spending have raised questions about returns on massive infrastructure investments.

Meta and Microsoft report next Wednesday, followed by Amazon and Apple on Thursday. All are expected to face similar scrutiny over their AI spending plans as earnings season continues.