Alphabet shares fall 13% as AI spending concerns return

Key Facts

Alphabet shares fell 13% on Thursday and were headed for their biggest one-day decline since trading began, as concerns returned over the cash cost of the AI race. Reuters reported that the company could lose more than $500 billion in market value if the decline continues, an estimate conditional on further losses. The shares had fallen more than 10% to $289.95 in extended trading after results were announced Wednesday evening. That came after the company reported third-quarter revenue of $127.58 billion, up 25% year on year. But revenue came in below the analysts’ average estimate of $127.97 billion, according to a FactSet survey, while net income available to common shareholders fell to $26.170 billion from $34.979 billion a year earlier.

Diluted earnings per share were $2.12, compared with $2.87 in the third quarter of the previous year. The Associated Press said the result included an $8.7 billion loss on equity investments, which reduced earnings per share by 55 cents. The results also showed free cash flow posting a deficit of $9.065 billion, wider than the $5.855 billion deficit in the second quarter. Purchases of property and equipment totaled $51.355 billion during the quarter, reflecting the scale of spending on assets and infrastructure. The sequence of two cash deficits, alongside this spending, puts the funding of expansion at the center of investors’ response to the results.

By contrast, Google Cloud stood out as a strong growth engine, with revenue rising 103% to $30.7 billion, a record pace of growth, according to Alphabet’s filing with the U.S. Securities and Exchange Commission. The company attributed the expansion to demand for infrastructure and AI solutions, as well as sales of TPU systems. Reuters said Alphabet is selling its custom AI chips, which it had used internally, and that systems sales contributed materially to cloud segment growth. The CFO said unsold TPU systems inventory is reflected in inventory, requiring cash to go out before customer receivables are collected. The head of Google Cloud said systems sales are expected to rise in the current quarter and expand strongly in 2027.

Search, meanwhile, presented a mixed picture between usage levels and advertising growth. Alphabet said year-on-year growth in search queries reached its fastest pace in five years. But search advertising revenue grew 12% in the third quarter, slowing from 17% in the second quarter and 19% in the first quarter, according to Le Monde. The Associated Press also said search and YouTube advertising revenue came in below some analysts’ expectations. In the results context, Chief Executive Sundar Pichai said the company had reached a half-trillion-dollar annual revenue run rate, pointing to the expanding scale of its business alongside uneven performance across its segments.

Reuters linked investors’ reaction to increased scrutiny of when AI returns will materialize relative to the pace of capital spending. The agency said some investors are no longer giving major cloud computing companies an open-ended mandate to spend. These concerns amount to a test of companies’ ability to turn demand for computing and chips into revenue and collected cash, as Alphabet continues expanding its infrastructure and cloud services. The CFO forecast that capital expenditure would rise significantly in 2027, with the company set to provide more details during its fourth-quarter earnings call.