Why Alphabet fell after earnings: revenue rose $7.78 billion in one quarter while operating income declined

Executive summary

Alphabet, Google's parent company, reported results for the quarter ended 30 September on the evening of 28 October. Revenue grew 25% to $127.58 billion, and Google Cloud revenue rose 103% to $30.71 billion. But the stock fell around 10% in pre-market trading on Thursday, when trading precedes the regular session and liquidity is lower.

In our research on results night, we examined the cash gap between Alphabet and Microsoft. This report analyses the income statement, which sets out the company's revenue, expenses and profits for the period. It moves from revenue to earnings per share (Earnings Per Share, EPS), the profit attributable to each share. Across four layers, this analysis reveals four reasons for the sell-off:

• Revenue: Search revenue growth slowed from 16.8% in the second quarter to 12.0%, its slowest pace in five quarters. YouTube advertising revenue growth slowed from 12.9% to 9.2%.
• Segments: Operating income at Google Cloud, the profit generated by the business after deducting operating costs, more than tripled, but Google Services operating income declined from the second quarter.
• Outside the segments: The loss under “Alphabet-Level Activities” (Alphabet-Level Activities) rose to $7.66 billion. This item sits outside all segments and mainly includes shared AI research and Gemini model development. As a result, revenue rose $7.78 billion from the second quarter, while operating income fell $0.19 billion.
• Investments: Gains on stakes in other companies, which lifted EPS to 9.11 dollars in Q2, turned into a loss of 8.66 billion dollars, mainly from the decline in SpaceX shares.

EPS came in at 2.12 dollars, below consensus estimates, the average of analysts’ forecasts, of 3.02 dollars according to EL7 data. Even excluding the investment loss, our calculation puts EPS at 2.67 dollars, 11.6% below estimates. The SpaceX loss alone therefore does not explain the gap.