Alphabet suffers record fall as AI Mode cuts advertising dollars
Biggest one-day decline on record
Shares in Google parent company Alphabet suffered their biggest single-day decline on record on Thursday, falling more than 12% as investors reacted to disappointing revenue and mounting AI costs.
The sell-off, which was more severe than any previous one-day decline, came after the company reported weaker-than-expected advertising revenue and a sharp deterioration in cash flow.
Although Google Cloud delivered strong growth, investors remained concerned about the enormous sums Alphabet is committing to AI infrastructure and the possibility that its spending is growing faster than the returns.
Alphabet reported negative free cash flow (i.e. it's spending more than it's making) of $9.1bn for the third quarter ending 30th September, well away from analysts' expectations that the company would come close to breaking even, according to LSEG data.
The company also recorded a cash outflow in Q2, of $5.9bn. It was Alphabet's second consecutive quarter of negative free cash flow, a significant departure for a company that has traditionally been one of the technology industry's strongest cash generators.
Alphabet CFO Anat Ashkenazi told analysts that capital expenditure was expected to increase substantially in 2027, compared with the company's projected spending of between $195bn and $205bn this year.
Although she did not disclose a specific figure for next year's investment, the prospect of another significant increase unsettled investors.
Ashkenazi also warned that using third-party cloud computing capacity would put pressure on profit margins in the near term.
The contrast with Microsoft was particularly noticeable.
The Windows developer reported $18.6bn in free cash flow for its third quarter, despite continuing to invest heavily in AI infrastructure. Its shares ended Thursday broadly unchanged, while Alphabet's fell more than 12%.
Search advertising slowdown
Alphabet's results also missed Wall Street expectations, highlighting the challenges facing its core advertising business.
Total revenue increased to $127.6bn, below analysts' estimates of $128.2bn. Advertising revenue reached $82bn, short of the expected $83.4bn.
The advertising shortfall was particularly significant because it overshadowed stronger-than-expected growth in Google Cloud.
Google's search advertising business is facing growing competition from AI-powered services like ChatGPT and Claude, which can serve information to users without involving traditional search engines.
The company has responded with changes to its own search experience through AI Mode, a chatbot-style interface that provides AI-generated responses. However, that has had financial repercussions.
Chief Business Officer Philipp Schindler said the greater adoption of AI Mode had contributed to a larger-than-expected slowdown in search advertising growth.
Alphabet is attempting to balance the introduction of AI-powered search features with the need to protect the advertising business that has historically generated most of its revenue.
Google Cloud growth offers some relief
Despite the disappointing advertising performance, Google Cloud delivered one of the strongest parts of Alphabet's results.
Revenue from the cloud computing division more than doubled to $30.71bn in Q3, exceeding analysts' expectations.
The division has benefited from growing demand among businesses for AI computing infrastructure, cloud services and access to Google's specialised processors.
Google Cloud chief executive Thomas Kurian said sales of the company's tensor processing units (TPUs), which compete with Nvidia's GPUs, had become a meaningful contributor to the division's business.
Alphabet began recognising revenue from direct sales of its TPU systems last quarter. These include the processors themselves as well as associated hardware and software.
The company's cloud backlog also increased to $561bn, with Ashkenazi saying Alphabet expected to recognise more than 55% of that amount as revenue over the next 24 months.