Alphabet Shares Fall 12.6% as Free Cash Flow Posts a $9.065 Billion Deficit
Key Facts
Alphabet Class A shares fell 12.6% on October 29, their worst session since they began trading more than 20 years ago, according to the Associated Press. The decline followed the release of third-quarter results, with annual revenue rising 25% to $127.58 billion. But that figure fell short of the $127.97 billion average analyst estimate, according to FactSet as cited by the news agency. The Nasdaq Composite fell 1.4% in the session, while the S&P 500 slipped 0.3% despite gains by most of its listed stocks. The company’s filing showed free cash flow turning negative as Alphabet bets on expanding its cloud business and AI systems.
Net income was $26.17 billion in the July-to-September period, compared with $34.98 billion in the third quarter of the previous year, the Associated Press reported. The company posted earnings per share of $2.12, affected by an $8.7 billion loss on equity investments. The news agency said the loss reduced earnings per share by 55 cents. In advertising, revenue from Google Search and other services rose 12% to $63.3 billion, while YouTube ad revenue increased 9% to $11.2 billion. Still, Reuters reported that advertising revenue came in $1.4 billion below Wall Street estimates, limiting the impact of stronger-than-expected cloud growth.
Google Cloud posted third-quarter revenue of $30.71 billion after more than doubling, exceeding the $29.57 billion average estimate and expected growth of 95.1%, according to Reuters. Alphabet said sales of its TPU processors contributed significantly to cloud growth, but it does not report revenue or margins for the units separately. Its sales include systems that combine chips with networking, storage and software. Those sales, however, require buying hardware and assembling inventory before collecting customer payments, putting pressure on cash. Chief Financial Officer Anat Ashkenazi said unsold systems appear in inventory: "You see cash go out," explaining that collections begin when the systems are delivered and customers are billed.
Free cash flow was negative $9.065 billion in the third quarter, according to Alphabet’s filing, with operating cash flow of $42.290 billion and capital expenditures of $51.355 billion. The deficit came against analyst expectations that cash flow would be close to breakeven, Reuters reported via MarketScreener. Cash burn had reached $5.9 billion in the previous quarter, the company’s first negative cash flow in 22 years as a public company, according to the same source. The company links the liquidity pressure to infrastructure spending and TPU system inventory that must be built before delivery and payment. Meanwhile, Google Cloud’s backlog stood at $561 billion, and Alphabet expects to recognize more than 55% of it as revenue over the following 24 months.
On demand for AI products, Chief Executive Sundar Pichai said the Gemini app had reached one billion users as of October 28, making it the fastest-growing product in Google’s history. Google Cloud Chief Thomas Kurian also said sales of TPU systems are expected to rise in the current quarter and accelerate substantially in 2027. The systems comprise chips alongside networking, storage and software, while the company has not provided separate figures for their revenue or margins. On spending, the CFO said Alphabet expects a significant increase in capital expenditures in 2027, compared with its 2026 spending forecast of $195 billion to $205 billion. The company added that further details on its spending plans would be provided on the fourth-quarter earnings call.
On advertising, Chief Business Officer Philipp Schindler said the slowdown in search ad growth was greater than expected, attributing it to increased use of the AI Mode interface, where the company was still testing ads. He added that Google will begin rolling out ads in AI Mode to international markets. Portfolio manager Dave Wagner said investors, amid concerns that AI could erode search activity, "need to see search accelerating, not slowing down." A Reuters report said the stock’s decline wiped about $500 billion off its market value after it fell on Wall Street and dropped further after hours. The report also said a potential public offering by Anthropic could later test market sentiment toward AI.