Martin Gamble on US markets: Alphabet and Tesla sink, Intel shines

US stocks were firmly on the back foot this week, driven by continued weakness across large technology companies, as worries build on AI spending.

Oil prices moved higher amid rising geopolitical tensions, keeping pressure on US 10-year government bond yields, which moved back above 4.7% for the first time since May.

After the prior week’s mauling, memory chip stocks saw a strong rebound led by gains in SanDisk, Western Digital and Micron Technology. AI server maker Super Micro Computer was the biggest gainer in the S&P 500 after revealing it had secured more than $40 billion worth of orders.

Defence contractor Lockheed Martin gained more than 10% after earnings came in ahead of forecasts and the company raised its outlook.

Alphabet punished on AI spending fears

Google parent Alphabet’s second quarter results came in comfortably ahead of analysts’ forecasts driven by 82% revenue growth in the Google Cloud Platform, reflecting strong demand for enterprise AI infrastructure.

CEO Sundar Picchu commented: “Q2 was an amazing quarter, with Alphabet revenues growing 24% year-over-year. It’s great to see wide adoption of Gemini Enterprise, with nearly 90% of the Fortune 100 using it.”

After initially responding positively to the results, the shares went south by as much as 7% as Alphabet raised its projection for full-year capital expenditures to $195 billion from $185 billion.

Chief Financial Officer Anat Ashkenazi explained: “We’re still in a supply-constrained environment. We are seeing very strong demand both from external cloud customers as well as across the business.”

While operating cash flow increased 41% year-on-year, capital expenditures doubled, which means Alphabet reported its first negative quarterly free cash flow in more than two decades.

Investor sentiment is souring as hyperscalers pour increasing amounts of capital into AI models, while a rival ecosystem driven by cheaper Chinese open-source models appears to be gaining traction.

Tesla skids on earnings slump and capex spike

Tesla shares fell more than 12%, wiping out around $200 billion worth of market value, after the company’s second quarter earnings fell well short of analysts’ estimates and the EV-maker revealed a 142% year-on-year increase in capital expenditures.

The shares have fallen by nearly a third this year and trade close to 12-month lows, reflecting fears over slowing growth and intensifying competition.

Revenue growth of 26% and record deliveries failed to fall through to earnings per share as lower average selling prices and rising costs impacted gross margins.

This suggests Tesla had to deploy heavy discounting to entice buyers in what has become a fiercely competitive market.

The increase in capex meant Tesla reported its first negative free cash flow in two years.

Musk insisted the money will be well spent: “I’m confident that all the things that we’re investing in will yield incredible returns. Really, maybe the best capex returns that we’ve ever seen,” added Musk.

Capex projects include six new factories, AI infrastructure and Terafab, which is a semiconductor facility in Austin, Texas, aimed at bypassing reliance on suppliers like TSMC, and solving AI compute bottlenecks.

The Terafab facility is expected to produce an unprecedented terawatt (a trillion watts) of compute capacity per year. To put that in perspective, a single terawatt of compute would require double the energy output of the current U.S. power grid.

Intel is riding the AI boom

The chipmaker reported second quarter earnings ahead of analysts’ forecasts, notching up its fastest revenue growth in more than a decade, driven by strong demand for AI infrastructure and data centres.

The shares rallied around 3% in after-hours trading and despite the recent pullback, they are up over 300% over the last 12 months.

In a statement CEO Lip-Bu Tan said: “AI is driving unprecedented demand for compute. As we continue to execute, Intel is well-positioned to capture sustainable growth across our CPU franchise.”

Intel projected third quarter revenues in a range of $15.8 billion to $16.8 billion, well ahead of analysts’ forecasts calling for $15.1 billion. The company also raised its capital expenditure guidance from $18 billion to $20 billion.