Alphabet shares fall 12.9% after revenue misses estimates and free cash flow turns negative at $9.07 billion
Key Facts
Alphabet shares fell 12.9% in Thursday trading on October 29, heading for their worst session since the company began trading more than 20 years ago, after it reported quarterly revenue below the average analyst estimate and negative free cash flow. Revenue rose 25% year over year to $127.58 billion in the third quarter of 2026, but came in below the average estimate of $127.97 billion, according to FactSet data cited by the Associated Press. GOOGL closed at $284.74, according to EL7 data. The decline came despite strong growth at Google Cloud, as investors focused on slower growth in some advertising revenue and the spending needed to expand AI infrastructure. Reuters reported that free cash flow turned negative for the first time in the company’s 22-year history as a publicly traded company.
Alphabet net income fell to $26.17 billion in the July-to-September quarter, from $34.98 billion in the same period a year earlier. Earnings per share were $2.12, weighed down by an $8.7 billion loss on equity investments that reduced earnings by 55 cents per share. Analysts had estimated earnings per share of about $3.01, according to the Associated Press. The figures put weaker earnings at the center of the market reaction alongside revenue falling short of expectations, while earnings per share were also affected by the investment loss. Revenue growth was strong year over year, but did not reach the level analysts had expected for the quarter.
Results across the advertising businesses were mixed: Google Search and other advertising revenue rose 12% to $63.3 billion, while YouTube advertising revenue increased 9% to $11.2 billion. The Associated Press said growth in both businesses came in below what some analysts had expected, without specifying a consensus estimate for YouTube advertising. By contrast, CEO Sundar Pichai said the annual growth rate in Search queries reached its highest level in five years. The divergence reflects broader use of Search alongside advertising revenue growth that did not keep pace with some analysts’ expectations. The Gemini app reached one billion users in October, and Pichai said it was the fastest-growing product in Google’s history.
Elsewhere in the group’s results, Google Cloud revenue rose 103% to $30.7 billion in the third quarter, with AI infrastructure and solutions contributing to the business’s growth. But cloud growth coincided with negative free cash flow of $9.07 billion, compared with negative $5.9 billion in the previous quarter. Reuters said the cash pressure was tied to increased cloud capacity and funding for AI research, as well as higher inventory of TPU systems and payment of a European Commission fine. The CFO said unsold custom TPU systems were using cash before customer payments were collected, explaining: "These systems that haven’t been sold yet will show up in the numbers, so cash is going out." This means that growth in cloud sales came with upfront funding for equipment and inventory, alongside research and development investment.
Investors are watching whether cloud growth and TPU system sales can balance financing needs and expansion costs. Google Cloud executives said sales of TPU systems are expected to rise in the current quarter and then accelerate significantly in 2027. On capital spending, the CFO said capital expenditures would increase "significantly" in 2027. She also forecast near-term margin pressure from the use of third-party cloud capacity. The company’s path ahead therefore combines expected growth in chip sales with continued infrastructure investment, while the current quarter showed that cloud expansion did not prevent free cash flow from turning negative.