Alphabet shares tumbled more than 9% between July 16 and 17 after a report that its next-generation Gemini 3.5 Pro AI model is delayed. Heavy selling volume during the drop suggests large holders were cutting exposure. The selloff comes just days before the company is set to report second-quarter results on July 22.
The Gemini 3.5 Pro Delay
The Gemini 3.5 Pro delay hit at a sensitive time. Alphabet has been racing to keep pace in the AI arms race, and any hiccup in its flagship model raises questions about its competitive position. The company's Tensor Processing Units (TPUs) are custom AI chips that rival Nvidia, allowing Alphabet to avoid paying Nvidia's margins. Citadel Securities says TPUs run some workloads about 30% cheaper and up to four times faster than Nvidia alternatives. But a delayed model could slow adoption of Alphabet's AI services, which rely on those chips.
Capital Spending Squeeze
Alphabet's 2026 capital spending guidance is between $180 billion and $190 billion, roughly double last year's $91 billion. Free cash flow roughly halved in the first quarter, while capital spending more than doubled from a year earlier. Chips and data centers are capitalized and depreciated over five to six years, so today's spending becomes a rising cost that erodes profit over time. To fund the buildout, Alphabet launched an $80 billion equity raise, its first major stock sale in about 20 years. Warren Buffett's Berkshire Hathaway added $10 billion to the equity raise.
Cloud Growth and AI Chip Strategy
Google Cloud grew 63% last quarter to $20 billion at a record margin; some previews expect close to $22 billion this quarter. That growth is a bright spot, but it comes as Big Tech — Google, Amazon, Microsoft, Meta — is spending a combined $700 billion on AI infrastructure this year, consuming 94% of their total operating cash flow. Alphabet backed TPU projects with billions in guarantees and a $5 billion venture with Blackstone. The bet is that custom chips will give it a cost edge over rivals that rely on Nvidia. But the massive upfront spending is a gamble that AI revenue will eventually catch up.
Investor Concerns
AI revenue bubble fears shadow the sector. With capital spending doubling and free cash flow shrinking, investors are watching for signs that the spending is paying off. The Gemini 3.5 Pro delay adds uncertainty. If Alphabet's AI model falls behind, the billions poured into TPUs and data centers may not generate the expected returns. The equity raise, while supported by Berkshire Hathaway, also dilutes existing shareholders.
Alphabet reports second-quarter results on July 22. Investors will be looking for updates on the Gemini timeline, cloud growth, and whether capital spending plans are on track. The stock's drop suggests the market is already pricing in some disappointment.
