Alphabet Spends 121.4% of Operating Cash Flow on Capex as Tech Stocks Slide
Key Facts
Alphabet shares fell on October 29 after quarterly results missed analyst estimates, while capital spending and cash-flow figures rekindled concerns about the cost of expanding artificial intelligence. The Associated Press reported that the company’s revenue reached $127.58 billion in the quarter ended in September, up 25% year over year, but below the average forecast of $127.97 billion. Net income fell to $26.17 billion from $34.98 billion in the same period a year earlier. Earnings per share were $2.12, compared with estimates of about $3.01. Reuters said Alphabet shares were down 11.7% during the session, heading for their biggest one-day decline on record, while the Nasdaq fell more than 1%.
The results showed a split between the cloud business and the company’s core search engine. Google Cloud revenue surged 103% year over year to $30.7 billion in the third quarter, and CEO Sundar Pichai said infrastructure and AI solutions were “the main drivers of cloud growth.” Sales of custom TPU chips contributed to the unit’s growth, but Alphabet does not separately disclose revenue or margins for those chips. By contrast, Google Search revenue growth slowed to 12% in the September quarter, below expectations for a 14.7% increase. Pichai said queries recorded their fastest growth in five years, while weakness in the core search business raised questions about whether AI tools could take market share from it, according to an S&P Global Visible Alpha analyst quoted by Reuters.
Investors’ concerns center on the scale of investment and whether it is translating into sufficient cash flow and returns. Alphabet’s purchases of property and equipment exceeded $51 billion in the latest reported quarter, and the Associated Press said the company consumed more cash during the quarter, as measured by free cash flow. In a comparison cited by Reuters, the company’s capital spending amounted to 121.4% of operating cash flow in the September quarter, compared with 68% for Microsoft when finance leases are excluded. An S&P Global Visible Alpha analyst said Microsoft’s quarter showed disciplined growth, while Google was “burning cash and its core business came in below expectations.” The analyst added that the divergence could raise questions about AI’s effect on search market share, despite the faster growth in queries.
Alphabet’s chief financial officer said the company expects to “significantly increase its capital expenditures” in 2027 and will provide more details during its fourth-quarter earnings call. Investment pressures are also evident in how the company finances its chips and systems: the CFO said unsold TPU systems will appear in inventory balances, meaning cash goes out before customer payments are collected. Reuters reported that TPU systems combine chips with networking and storage equipment and software, and that sales are expected to rise in the current quarter before expanding sharply in 2027. The chips made a meaningful contribution to Google Cloud’s growth in the September quarter, without separate disclosure of their revenue or margins. Investors are therefore watching spending details and cash returns as the company continues to expand its cloud and AI businesses.
Market pressure spread to other technology companies, though company-specific news differed. ServiceNow shares fell 23% on October 29 after a third-quarter earnings miss outweighed the company’s higher annual forecasts for subscription revenue and free cash flow margin. Subscription revenue was $3,988 million, up 21% year over year, and the company raised its 2026 annual contract value target for AI to $1.7 billion. Marvell Technology shares fell 11.6% amid reports of advanced talks to buy Lumentum, which specializes in data center optics. Alphabet’s decline, meanwhile, was tied to results below analyst estimates and concerns about spending and cash flow, not a capital spending figure that missed expectations.
In moves in the opposite direction, Oracle shares ended the October 28 session up about 11% after the company said it intends to cap external financing and forecast its cash flow turning positive in the second half of fiscal 2028. Amazon shares fell 2.9% on October 29 ahead of its quarterly results, due after markets closed. These moves add to the market’s focus on financing digital infrastructure and when it will translate into cash, while company results and guidance remain the direct drivers of each stock. For Alphabet, the CFO said details on the capital spending trajectory would be presented during the fourth-quarter earnings call. The company also forecast a significant increase in spending in 2027, while the head of Google Cloud said sales of TPU systems would expand sharply that year.