Google's parent company, Alphabet, saw its stock tumble 7% on Thursday after revealing plans to significantly increase capital expenditure this year. The funds will be used to purchase new AI chips, servers, and build data centers. This decline has nearly erased the stock's entire gain for the year.

Certainly, the broader market experienced a sell-off, widely attributed to rising oil prices and escalating tensions with Iran. However, Alphabet was hit the hardest, and Tesla did not escape unscathed either: Tesla disclosed a sharp increase in capital spending on Wednesday, leading to a 15% plunge in its stock price on Thursday. Tesla's share price is more driven by market sentiment towards Elon Musk than by fundamental realities, making it difficult to judge its valuation by rational standards. But the situation for Alphabet is entirely different.

There is no doubt that among large technology companies, Google holds a leading edge in capitalizing on AI development, leveraging its chips, AI large language models, and consumer applications poised to benefit from the AI revolution. Yet, even for Alphabet, the market cannot help but question: How much more capital will this company need to invest to reach its anticipated vision?

Alphabet now estimates its capital expenditure for this year will reach a staggering $205 billion, more than double its 2025 spending level, which itself was nearly three times what it was two years ago. Chief Financial Officer Anat Ashkenazi stated on Wednesday that capital expenditure will see another "significant increase" next year. Neuberger Berman analyst Dan Flax noted that Alphabet's capital spending could "easily exceed $300 billion." For context, S&P Global Market Intelligence data shows analysts expect the company to generate $259 billion in cash flow from operations next year.

This means Alphabet could burn through $40 billion in cash next year. This represents a massive reversal for a company that had consistently generated $60 billion to $70 billion in free cash flow for years. When will this massive spending spree end? Alphabet's management has not provided a clear answer. CEO Sundar Pichai repeatedly states that the AI transformation is still in its "early days," suggesting that high spending could continue for a considerable period. Ashkenazi said on Wednesday, "As long as the investments generate compelling returns, we will continue to invest." In other words, the market is being asked to trust the company. However, this narrative may now be a difficult sell for investors.