Mag 7’s can’t stop spending — even when it hurts them. This week proved that.
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Hello reader.
Two suspects are arrested together, then interrogated in separate rooms.
The same deal is offered to all of them. also…
- Take the other one out and let him go.
- Stay calm – and I hope others do too.
Naturally, they both talk to avoid blame. The ironic result? They each receive a longer prison sentence than they would have received had they both remained silent.
The suspects ended up with the outcome they tried to avoid.
This is called the prisoner’s dilemma. Once you know what it looks like, you start seeing it everywhere, especially when it comes to money.
Take OPEC, the Organization of the Petroleum Exporting Countries, for example. Each member knows that the group will benefit if everyone limits oil production. But each country has an incentive to pump more oil to make more money, so the agreement is under constant pressure.
Now, the Seven Wonders seem stuck in their own version of the prisoner’s dilemma, all over capital spending on artificial intelligence. No company wants to outspend its competitors, so every company feels compelled to keep pouring billions into AI infrastructure — even if it hurts profits in the near term.
We are seeing this dilemma as the first earnings release this week.
So, on the day Smart moneyLet’s take a look at the latest results from Alphabet Company (Google) and Tesla company (TSLA)And what they reveal about the Mag 7 as an investment.
Next, I’ll show you how to organize your portfolio to avoid the problems these companies face.
Let’s jump in…
Suspect Number One: Alphabet’s growth story has a problem
Let’s start with suspect number one.
Alphabet was the first of the seven major technology companies to report second-quarter earnings on Wednesday after the bell.
Its revenue reached $119.8 billion, exceeding Wall Street expectations of $116.93 billion, and year-over-year revenue growth was 24%. Earnings per share came in slightly lower than expected, at $2.85, adjusted for the price target of $2.89.
However, the main focus here is growth.
- Cloud revenue increased 82%, and cloud backlog expanded to $514 billion.
- Google’s Antigravity AI agent platform now has more than 2.4 million weekly active users.
- Since the global launch of the AI mode for search last October, search usage has soared. Google now has over 1 billion monthly active users.
Growth remained the main focus of Alphabet’s capital expenditures (CapEx). The budget for spending on artificial intelligence was raised to $195 to $205 billion for this year, compared to previous expectations of $180 to $190 billion.
This increase is less exciting for investors to hear. Higher spending means lower profits in the short term. However, you can’t say they weren’t warned. Alphabet CEO Sundar Pichai recently alluded to the AI prisoner’s dilemma, claiming that “the risk of underinvestment is exponentially greater than the risk of overinvestment.”
This makes the rise in VC less surprising, but no less sustainable.
The demand for AI infrastructure has led to highly scaling companies depleting their cash reserves, even causing them to tap credit markets for additional financing. Annual issuance of debt related to AI and data centers rose from $166 billion in 2023 to $625 billion last year, and this includes not only Alphabet, but other Mag 7 members. Meta Platforms Inc. (dead) and Microsoft Corporation (MSFT).
These companies certainly remain very profitable. But the financial slack they once enjoyed is disappearing, and the market is taking notice. Alphabet stock fell about 6% the next day.
Now, let’s take a look at suspect number two…
Suspect #2: Tesla’s CapEx problem
On Wednesday, Tesla also reported lower-than-expected second-quarter earnings, coming in at a revised $0.33 versus an expected $0.51. But its revenue exceeded expectations – $28.24 billion, exceeding the expected $25.71 billion.
Although Tesla’s revenue increased 26% year-over-year and its auto sector performed well, its shares fell about 15%. This decline is due to a combination of factors, including a significant increase in capital expenditures.
The EV-turning-AI company saw its VC capital increase by 142% in the second quarter, rising from $2.39 billion to $5.79 billion. This jump indicates that the company is likely on track to exceed the $25 billion capex target mentioned by CFO Vaibhav Taneja for this year. This represents a significant increase of 200% compared to the previous year.
Tesla is currently modernizing its factories to produce two-seat self-driving cyber cars, and is continuing to develop its Optimus humanoid robot, while also preparing to build a large artificial intelligence chip manufacturing plant in Texas.
Musk acknowledges the workload and cost, saying, “It’s OK to be a little less capital efficient if it helps us finish sooner.” This feeling became a common denominator among MAG 7 prisoners.
Microsoft, Amazon.com (Amzn), Meta is expected to announce its earnings this week. So, we’ll need to wait and see whether Microsoft’s $190 billion capex for 2026 rises… or whether costs for Amazon’s AI infrastructure projects increase… or how much Meta’s AI model expenses hit its balance sheet.
But we do know this: the more 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 other major players also means Spending Like them.
Alphabet and Tesla have already proven this.
So, instead of falling into this costly cycle, here’s how to position your investment portfolio…
How to escape the prisoner’s dilemma completely
In the Mag7 world, AI has become a “cost center,” rather than a powerful growth engine. Once you shift the focus away from that group, you begin to see the full scope of opportunities in the market.
in Fry investment reportWe carefully select companies from a variety of sectors to invest in, especially as we navigate the unpredictable age of artificial intelligence.
The AI boom isn’t just creating huge opportunities for chip companies or ultra-fast companies. It increases demand in energy, mining, healthcare, retail, e-commerce, and many other industries.
For example, the International Energy Agency reports that global data center energy consumption is expected to reach about 945 TWh by 2030 (more than double the 415 TWh that data centers consumed globally in 2024). Therefore, we retain several energy companies to help maintain the electricity grid in real time.
These properties include opportunities in natural gas and renewable energy. One renewable energy pick is an ETF that is up 53% since I recommended it last year, with plenty of upside remaining.
This is just one example of our strategy: looking beyond obvious AI trades to uncover overlooked opportunities. Instead of falling into the prisoner’s dilemma of Mag 7, we invest in companies that benefit from the AI boom without the burden of a spending race.
To know the names of the stocks we hold Fry investment reportIn addition to the research behind each choice, Click here to learn more.
It is considered,
Eric Fry
