Alphabet shares fall 11.7% as concerns over AI costs return
Key Facts
Alphabet shares fell 11.7% during Thursday's session on October 29 and were on track for their biggest one-day loss, according to a Reuters update. The decline followed the release of third-quarter results, as investors' concerns resurfaced that accelerating investment in AI may not generate returns commensurate with its cost. Reuters estimated that the company could lose more than $464 billion in market value if the decline continued. EL7 data showed the stock closed at $284.74 on October 29, compared with a close of $324.89 in the previous session. In the same update, the Nasdaq Composite was down 1.20% at 11:49 a.m. Eastern time, versus declines of 0.35% for the Dow Jones and 0.32% for the S&P 500.
Alphabet's third-quarter revenue was $127.58 billion, up 25% year over year, but below analysts' average estimate of $127.97 billion, according to The Associated Press. The gap between strong annual growth and missed expectations reflected a direct reason for the market's disappointment with the results. Net income was $26.17 billion for the July-to-September period, compared with $34.98 billion in the same quarter a year earlier. Earnings per share were $2.12, affected by an $8.7 billion loss on equity investments. The revenue shortfall and decline in net income therefore appeared in the same report, while cloud revenue was growing faster than the advertising business.
Google Cloud posted revenue of $30.7 billion in the third quarter, up 103% from a year earlier, according to The Associated Press. The company attributed the growth to infrastructure and AI solutions, underscoring strong demand for its cloud services at the same time that investors were scrutinizing advertising revenue more closely. By contrast, revenue from Google Search and other advertising rose 12% to $63.3 billion. YouTube advertising revenue increased 9% to $11.2 billion. The AP noted that the increases in Search and YouTube came in below some analysts' expectations, despite growing from a year earlier.
Capital spending remained another focus for investors assessing the results, with Alphabet's purchases of property and equipment exceeding $51 billion in the latest quarter, according to The Associated Press. The agency said the company used up more cash, as measured by free cash flow, alongside those purchases. Alphabet's results, Reuters said, brought concerns about rising AI costs back to the fore, while the AP linked market pressure to questions over whether returns would justify the cost of building data centers and filling them with chips. Reuters said the Nasdaq fell more than 1% on Thursday, while other major stocks showed mixed performance. The Philadelphia Semiconductor Index also fell 0.9%, heading for an end to a four-session winning streak.
Alphabet's chief financial officer said the company still expects capital expenditures to rise "significantly" in 2027, with further details to be provided during the fourth-quarter earnings call, according to The Associated Press. That outlook puts the spending path at the center of investors' focus on upcoming results, amid the cash use recorded alongside purchases of equipment and facilities. The expected disclosure will come during the fourth-quarter call, as the agency reported, citing the CFO. Until then, the third-quarter results show a contrast between 103% growth in cloud revenue, 12% growth in Search and other advertising revenue, and total revenue below analysts' average estimate. The expected level of capital expenditures in 2027 also remains a key point to watch as concerns continue over the cost of expanding AI.