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Hello, Reader.
Two suspects are arrested together, then interrogated in separate rooms.
Each is offered the same deal. Either…
- Rat out the other and go free.
- Stay quiet – and hope the other does, too.
Naturally, both talk to avoid blame. The ironic result? They each receive a longer prison sentence than they would have if they’d both stayed silent.
The suspects ended up with the outcome they tried to avoid.
This is called the prisoner’s dilemma; and once you know the shape of it, you start seeing it everywhere, especially where money is involved.
Take OPEC, the Organization of the Petroleum Exporting Countries. Every member knows the group benefits if everyone limits oil production. But each country has an incentive to pump a little more oil to make extra money, so the agreement is constantly under pressure.
Now, the Magnificent Seven seems to be caught in its own version of the prisoner’s dilemma, all over AI capital spending. No company wants to be outspent by its rivals, so each feels compelled to keep pouring billions into AI infrastructure – even if doing so hurts near-term profits.
We’re witnessing this dilemma as the first of the septet released earnings this week.
So, in today’s Smart Money, let’s look at the latest results from Alphabet Inc. (GOOGL) and Tesla Inc. (TSLA), and what they reveal about the Mag 7 as an investment.
Then, I’ll show you how to organize your portfolio to avoid the issues these companies are facing.
Let’s jump in…
Suspect Number One: Alphabet’s Growth Story Has a Catch
Let’s start with suspect number one.
Alphabet was the first of the seven Big Tech companies to report second-quarter earnings on Wednesday after the bell.
Its revenue came in at $119.8 billion, beating Wall Street’s expectations of $116.93 billion, and year-over-year revenue growth stood at 24%. Earnings per share came in slightly lower than expected, at $2.85, adjusted rather than the targeted $2.89.
However, the main focus here is growth.
- Cloud revenue increased by 82%, and cloud backlog expanded to $514 billion.
- Google’s Antigravity agentic AI platform now has more than 2.4 million weekly active users.
- Since the global launch of Search’s AI Mode last October, search usage has risen. Google now counts over 1 billion monthly active users.
Growth remained a key focus for Alphabet’s capital expenditures (CapEx). It raised its AI spending budget to $195-$205 billion for the year, up from the earlier forecast of $180-$190 billion.
This increase is less exciting for investors to hear. Higher spending means lower profits in the short term. You can’t say they weren’t warned, though. Alphabet CEO Sundar Pichai recently alluded to the AI prisoner’s dilemma, arguing that “The risk of under-investing is dramatically greater than the risk of over-investing.”
That makes the surge in CapEx unsurprising, but not any less unsustainable.
The demand for AI infrastructure has caused hyperscalers to deplete their cash reserves, even prompting them to tap the credit markets for additional financing. Annual issuance of debt tied to AI and data centers surged from $166 billion in 2023 to $625 billion last year, That not only involves Alphabet, but fellow Mag 7 members Meta Platforms Inc. (META) and Microsoft Corp. (MSFT).
Sure, these companies remain immensely profitable. But the financial slack they once enjoyed is disappearing, and the market is noticing. Alphabet’s stock dropped about 6% the next day.
Now, let’s look at suspect number two…
Suspect Number Two: Tesla’s CapEx Problem
On Wednesday, Tesla also reported lower-than-expected earnings for the second quarter, coming in at $0.33 adjusted versus the expected $0.51. But its revenue exceeded expectations – $28.24 billion, beating the expected $25.71 billion.
Although Tesla’s revenue increased by 26% year-over-year and its automotive segment is performing well, its shares fell by nearly 15%. This decline is due to a combination of factors, including a significant rise in CapEx.
The EV-turning-AI company saw its CapEx increase 142% in the second quarter, rising from $2.39 billion to $5.79 billion. This leap suggests the company is likely on track to exceed the $25 billion capex target that CFO Vaibhav Taneja mentioned for this year. That’s a substantial 200% rise over the prior year.
Tesla is currently updating its factories to produce two-seater driverless Cybercabs and continues developing its Optimus humanoid robots, while also preparing to build a large AI chip manufacturing plant in Texas.
Musk acknowledges the workload and its cost, saying, “It’s okay to be slightly less capital-efficient if it helps us finish sooner.” This sentiment is becoming a common denominator amongst the Mag 7 prisoners.
Microsoft, Amazon.com Inc. (AMZN), and Meta are expected to release their earnings this coming week. So, we will need to wait and see whether Microsoft’s $190 billion CapEx for 2026 rises… or if the costs for Amazon’s AI infrastructure projects increase… or just how much Meta’s AI model expenses are catching up with its balance sheet.
But we know this: The harder the Mag 7 tries to avoid falling behind in AI, the deeper they lock themselves into the very prisoner’s dilemma they’re trying to escape. Competing with the other major players also means spending like them.
Alphabet and Tesla prove this already.
So, rather than getting caught in this costly cycle, here’s how to position your portfolio…
How to Escape the Prisoner’s Dilemma Entirely
In Mag 7’s world, AI has become a “cost center,” rather than a powerful growth driver. And once you shift focus away from that group, you begin to see the full range of opportunities in the market.
At Fry’s Investment Report, we carefully select companies from a diverse array of sectors to invest in, especially as we navigate the unpredictable AI age.
The AI boom isn’t just creating enormous opportunities for chip companies or hyperscalers. It’s driving demand in energy, mining, healthcare, retail, e-commerce, and many other industries.
For example, the International Energy Agency finds that the global energy consumption for data centers is projected to reach around 945 Terawatt-hours (TWh) by 2030 (more than double the 415 TWh that data centers consumed globally in 2024). So, we’re holding several energy companies helping sustain the power grid in real time.
Those holdings include opportunities in natural gas and renewable energy. One of those renewable energy picks is an ETF up 53% since I recommended it last year, with plenty of upside left.
That’s just one example of our strategy: looking beyond the obvious AI trades to uncover overlooked opportunities. Instead of getting caught in the Mag 7’s prisoner’s dilemma, we invest in the companies benefiting from the AI boom without shouldering the burden of the spending race.
To find out the names of the stocks we’re holding in Fry’s Investment Report, along with the research behind each pick, click here to learn more.
Regards,
Eric Fry
