Alphabet Falls 12.6% as Nasdaq Slips on Rising Concerns Over AI Spending
Key Facts
The Nasdaq Composite fell to 26,184.72 in the October 29 session, down from 26,549.85 the previous day, as Alphabet Class A shares dropped 12.6% in their worst daily performance since beginning trading more than 20 years ago. The S&P 500 closed down 0.3% at 7,720.39, posting its first decline in four sessions. But most index components did not fall: four out of five stocks rose, and the index would have ended the session higher were it not for Alphabet’s decline, according to the Associated Press. The Russell 2000 rose 1% to 2,859.22, signaling a divergence in broader stock performance as pressure weighed on megacap technology shares. The agency attributed Alphabet’s decline to concerns about returns on AI investments after weaker-than-expected summer growth.
The share decline refocused investors on how much Alphabet is spending on the infrastructure needed to expand its AI business, and on its ability to convert that spending into cash flow. Capital expenditures totaled $51.355 billion in the third quarter, while free cash flow posted a deficit of $9.065 billion. The deficit was smaller in the second quarter, at $5.855 billion, showing a widening gap between cash investment and available returns in the latest quarter. The Associated Press reported that higher borrowing costs for buying chips and building data centers add pressure to future spending decisions. The agency said these concerns came despite continued growth in the company’s revenue.
Alphabet reported third-quarter revenue of $127.6 billion, up 25% year over year and marking its 13th consecutive quarter of double-digit revenue growth, according to the company’s filing with the U.S. Securities and Exchange Commission. Google Cloud was a major source of growth, with revenue rising 103% to $30.7 billion, as sales of TPU systems contributed to the increase. The figures reflect strong demand for cloud infrastructure and AI solutions, while capital expenditures and free cash flow remain central to investors’ assessment of the results. Growth was not confined to the cloud: the company said search query growth reached its fastest pace in five years. This presents a mixed picture of the quarter: expansion in revenue and services alongside high capital spending and a larger cash deficit.
Chief Executive Sundar Pichai said the Gemini app had reached 1 billion users and Alphabet had reached a $500 billion annual revenue run rate. The company’s statement added that search query growth reached its fastest pace in five years, signaling continued use of its core services alongside the expansion of AI products. The shares fell despite these indicators, as the market focused on the scale of investment required to support growth in cloud and AI. Pichai described the quarter’s performance as strong, saying, “The Gemini app has reached 1 billion users,” and that the company had “reached a $500 billion annual revenue run rate.” These indicators put user and revenue growth alongside the question raised by the market about the cost of financing infrastructure.
On the U.S. economy, real gross domestic product grew at an annual rate of 3.4% in the third quarter, after growth of 2.2% in the second quarter, according to the Bureau of Economic Analysis’ advance estimate. Increases in investment and consumer and government spending contributed to growth, while a decline in exports offset part of those increases. The reading provides economic context for a session in which major indexes fell despite gains across most S&P 500 stocks, without shifting the market’s focus from technology company results. On October 28, the Federal Reserve kept its target interest rate range at 3.75% to 4%, with the decision passing by a 10-to-2 vote. The next estimate of third-quarter GDP is scheduled for release on November 25.