Alphabet falls 12.6% after quarterly revenue misses estimates and free cash flow turns negative
Key Facts
Alphabet Class A shares fell 12.6% in the October 29 session, their worst daily performance since they began trading more than 20 years ago, and closed at $283.82, according to EL7 data and the Associated Press. The decline followed the release of third-quarter results: revenue grew strongly but fell short of the average analyst estimate. Earnings and earnings per share, meanwhile, declined from the same quarter a year earlier. Concerns focused on weak advertising revenue and heavy spending to build AI and cloud capacity. The results showed that business growth did not prevent investment from weighing on free cash flow.
Third-quarter revenue was $127.577 billion, up 25% year over year, but below the average analyst estimate of $127.97 billion, according to Alphabet’s filing with the U.S. Securities and Exchange Commission and FactSet estimates cited by the Associated Press. Net income was $26.468 billion, compared with $34.979 billion a year earlier. Net income available to common shareholders was $26.170 billion, and diluted earnings per share were $2.12, versus $2.87 in the third quarter of the previous year. The difference between the two net income figures reflects that the amount available to common shareholders is lower than total net income. Thus, sales growth coincided with lower earnings and earnings per share.
At Google Services, revenue rose 11% to $96.3 billion, driven by a 12% increase in search and other advertising revenue to $63.350 billion. YouTube advertising revenue also rose 9% to $11.207 billion, according to the company’s filing. But Reuters said advertising revenue fell short of expectations by $1.4 billion, a miss that cloud’s outperformance did not offset. Business chief Philipp Schindler attributed a slowdown in search advertising growth, which was greater than expected, to increased use of AI Mode. Reuters said the company is still testing ads in the mode, making wider adoption a point to watch for the performance of its advertising search engine.
By contrast, Google Cloud revenue more than doubled to $30.709 billion, a 103% year-over-year increase, according to Alphabet’s filing. Cloud operating income rose to $11.121 billion from $3.594 billion in the same quarter a year earlier. CEO Sundar Pichai said the Gemini app had reached 1 billion users, describing it as the fastest-growing product in Google’s history. He added that the year-over-year growth rate in search queries was the highest in five years. This performance puts the expansion of AI and cloud products alongside questions about their effect on advertising and infrastructure costs.
Free cash flow was negative $9.065 billion in the third quarter, following negative $5.855 billion in the second quarter, giving the company two consecutive quarters of negative cash flow, according to the filing. Purchases of property and equipment reached $51.355 billion during the quarter. CFO Anat Ashkenazi said inventory of unsold TPU systems was consuming cash because the company buys the hardware before customers pay, describing this as a different cash flow generation cycle from traditional capital spending. TPU systems include chips, networking and storage equipment, and software. Free cash flow had posted its first negative reading in 22 years as a public company in the previous quarter, Reuters reported.
Alphabet kept its 2026 capital expenditure forecast at between $195 billion and $205 billion, while Ashkenazi projected a significant increase in 2027. She said the company would provide further details during its fourth-quarter earnings call. She also forecast near-term margin pressure from using third-party cloud capacity, Reuters reported. Google Cloud chief Thomas Kurian said TPU system sales were expected to rise in the current quarter and then expand significantly in 2027. On demand, Google Cloud’s backlog of contracted but unfulfilled work stood at $561 billion, and the company expects to recognize more than 55% of it as revenue over 24 months, according to Reuters.
Alphabet’s decline came in a session when U.S. indexes fell: the S&P 500 dropped 0.3%, the Nasdaq Composite fell 1.4%, and the Dow Jones declined 132 points, or 0.3%, according to the Associated Press. Still, four out of five S&P 500 stocks rose, while Alphabet’s drop weighed on the index. In the quarter’s economic backdrop, real gross domestic product grew at an annual rate of 3.4% in the third quarter, after 2.2% in the second quarter, according to the U.S. Bureau of Economic Analysis’ advance estimate. The core personal consumption expenditures price index rose 0.3% from the previous month and 3.1% year over year in September. The bureau scheduled the release of its October personal income and outlays report for November 25, 2026.