Tesla Is About To Spend a Lot More on AI. Will the Rest of Big Tech Follow?

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Tesla on Wednesday said it’s ramping spending on AI. That could be a sign of what’s to come when a slew of Big Tech companies report results next week.

Tesla (TSLA) forecast capital expenditures would exceed $25 billion this year, nearly triple the $8.5 billion it spent last year. Capex totaled about $2.5 billion in the first quarter, suggesting the bulk of this year’s spending has yet to come. Executives are calling this a cost of the kind of business Elon Musk says Tesla intends to do as it shifts toward non-car businesses.

"While this may seem a lot and we will have the impact of negative free cash flow for the rest of the year, we believe this is the right strategy to position the company for the next era," said CFO Vaibhav Taneja of Tesla’s spending plans on a call with analysts Wednesday night.

Big tech's AI investments have been a major source of fuel for the bull market and the U.S. economy over the past few years. Tesla's plan to dramatically increase capital expenditures this year could signal those investments won't decline anytime soon.

Tesla stock fell Thursday as investors evaluated the electric car maker’s better-than-expected earnings, surging capex, and progress on new initiatives like a custom AI semiconductor and the Optimus humanoid robot. Shares opened nearly 4% lower, before paring their losses. Despite the move, stocks are broadly higher today, extending an upward run driven in large part by investor willingness to get on board with the investments Big Tech has made on the AI buildout.

Tesla’s forecast could foretell similar increases from the so-called hyperscalers—Microsoft (MSFT), Alphabet (GOOG), Amazon (AMZN), Meta (META), and Oracle (ORCL)—the first four of which are slated to report results next Wednesday. Together, they’ve projected capital spending will range between $640 billion and $670 billion this year.

Those investments have at times unsettled investors who fear they’re misallocating capital and fueling a speculative bubble in their rush to build AI-enabling data centers. For a while, those fears were allayed by the undeniable strength of each company’s balance sheets and income statements.

But the spending spree has taken its toll. Free cash flows have declined significantly over the past few years, and are expected to turn negative this year at Oracle and Amazon. Some hyperscalers, including Meta and Alphabet, have turned to debt markets to fund their data center buildouts, upping the risk of the endeavor.

To be sure, most of the hyperscalers remain on solid financial footing. "At this moment, our ratings on these companies, sans Oracle Corp., are not impacted by this weakening of cash flow," wrote S&P Global analysts on Tuesday. Oracle is an outlier due to its "structurally higher leverage and weaker internally generated cash flow relative to investment needs."

Still, anxiety about AI spending could rear its head when hyperscalers report next week. Bank of America analysts on Thursday listed “increase in capex outlook” among the risks Alphabet faces heading into its results.

After years of gargantuan capex increases, tech giants may be reluctant to spend more. Alphabet CEO Sundar Pichai said at a conference earlier this week that the company expects to invest between $175 billion and $185 billion in capex this year, the same range shared in its last earnings report.

Big tech stocks were pressured by negative investor sentiment in the early months of this year, but have rebounded in the last month amid optimism about easing tensions in the Middle East. As of Wednesday afternoon, shares of Amazon, Alphabet, and Meta were up 12%, 8%, and 1%, respectively, since the start of the year. Microsoft stock has declined about 12%, weighed on by the AI-disruption fears that have hammered nearly all software stocks this year.

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