Alphabet Falls 12.6% Despite 25% Revenue Growth and 103% Cloud Surge
Key Facts
Alphabet reported results on October 28 for the quarter ended September 30, posting consolidated revenue of $127.6 billion, up 25% year over year, its thirteenth consecutive quarter of double-digit annual growth. But revenue fell short of analysts’ estimate of $128.2 billion, according to LSEG data cited by Reuters. In the following session, the company’s Class A shares fell 12.6%, their worst day since they began trading more than 20 years ago, according to the Associated Press. The results showed a contrast between strong growth in cloud and search, declines in net income and earnings per share, and heavy capital spending. Investors’ focus shifted to whether that spending can support growth and improve cash flow as AI infrastructure expands.
Net income available to common shareholders fell to $26.170 billion from $34.979 billion in the same period a year earlier, while diluted earnings per share declined to $2.12 from $2.87, according to the company’s filing. By contrast, operating income rose 30% to $40.576 billion, and the operating margin was 31.8%. The divergence shows that the decline in net income was not accompanied by a contraction in operating profit during the quarter. Alphabet reported growth across its core segments, but earnings available to shareholders and earnings per share declined year over year. The results therefore presented two different trends: expansion in operating activity and pressure on reported net profit.
Google Services generated revenue of $96.3 billion, up 11% year over year, with Google Search & other leading growth within the segment as revenue rose 12%. Alphabet said annual growth in search queries reached its fastest pace in five years. Google advertising revenue was about $82.012 billion, compared with $74.182 billion in the third quarter a year earlier, while YouTube advertising revenue rose to $11.207 billion from $10.261 billion. Still, advertising revenue of $82 billion, according to Reuters’ estimate, fell short of analysts’ expectations of $83.4 billion. Business chief Philipp Schindler said increased use of AI Mode had contributed to slower growth in search advertising, and that the company would begin rolling out ads in the mode in international markets.
Google Cloud emerged as the fastest-growing reported business, with revenue rising 103% to $30.7 billion. Alphabet attributed the increase to strong demand for AI infrastructure and enterprise solutions, alongside core GCP services. The company said sales of TPU systems contributed materially to revenue growth. Cloud backlog reached $561 billion, and CFO Anat Ashkenazi expected more than 55% of it to be recognized as revenue over the next twenty-four months. In Other Bets, revenue was $372 million, while the operating loss widened to $2.047 billion, compared with a loss of $1.426 billion in the same period.
On the use of AI products, CEO Sundar Pichai said the Gemini app had reached one billion users. He added that the company’s first-party model interfaces process nearly 32 billion tokens per minute, more than four times the level recorded a year earlier. He also said Alphabet was operating at an annual revenue run rate of half a trillion dollars. These figures put the expansion of the company’s products and operating capabilities in the context of its results, while search and advertising performance remain central concerns for investors. David Wagner, portfolio manager at Aptus Capital Advisors, said the quarter’s results strengthen the case that Alphabet can compete with Microsoft in AI, but noted that the rest of the picture raises concerns as search growth slows.
The free cash flow deficit widened to $9.1 billion in the third quarter, marking the second consecutive quarter of negative free cash flow, according to Reuters. The agency compared the result with analysts’ expectations for cash flow to approach breakeven. The company’s purchases of property and equipment also exceeded $51 billion during the quarter, as spending on data centers and AI chips raised concerns about returns on investment. Ashkenazi said the use of third-party cloud capacity could weigh on margins in the near term. She said the company expected a significant increase in capital expenditures in 2027, with more details to be provided on the fourth-quarter earnings call.
The decline spread to U.S. indexes on October 29, with the S&P 500 down 0.3% and the Nasdaq Composite falling 1.4%, according to the Associated Press. Alphabet declared a quarterly cash dividend of $0.22 per share for its Class A, B and C shares, payable on December 14, 2026, to shareholders of record on December 7. Looking ahead, attention is turning to the details of 2027 capital spending that the company promised to provide during its fourth-quarter earnings call. Markets will also track the rollout of ads in AI Mode in international markets and the pace at which Cloud backlog is recognized as revenue. The ability of cloud and AI growth to support cash flows and margins will remain among the key factors in assessing the company’s next results.