Alphabet Inc.'s equity has lost over $500 billion after the company reported disappointing sales figures in search and advertising. These results have raised investor concerns about the threat artificial intelligence poses to the company's core business, as well as rising infrastructure costs.
Alphabet shares fell by more than 13%, marking the largest market value collapse in the company's history. The company reported revenue of $111.2 billion for the third quarter, excluding partner payments, which was below analysts' forecasts. Ad revenue from search and other channels, which accounts for about half of total revenue and is critical for funding massive AI investments, also failed to meet expectations, showing the slowest growth in five quarters.
JPMorgan analysts, including Doug Anmut, noted that the results and market reaction 'show us the acceptable margin of error when a hyper-scale player spends hundreds of billions on creating AI infrastructure.' Shares dropped 13% to $281.37, wiping out $511 billion from Alphabet's market capitalization as of 9:35 AM in New York. This contrasts sharply with the results of competitor Microsoft Corp., which reported growth in its cloud business exceeding Wall Street expectations while controlling costs.
Philip Schindler, Chief Commercial Officer, stated during the investor call that the growing popularity of the AI Mode—a new tab in Google Search—negatively impacted financial results. He noted that AI-related queries have 'lower monetization' but expressed optimism, stating plans to add more advertising to this part of the search engine.
Investors have long worried about the impact of chatbots and AI features on the company's main revenue stream, as consumers turn to competitors like ChatGPT and Claude, as well as Google's own AI features. Pressure is mounting on Alphabet executives, particularly Sundar Pichai, to justify future payments exceeding $1 trillion that Google incurs for resources needed to realize its AI ambitions, including data centers, computing power, and energy.
Thomas Monteiro, Senior Analyst at Investing.com, believes that the current quarter is a 'moment of truth for Alphabet: either Pichai and his team will fix how the company monetizes AI, or the giant risks losing leadership in several of its core areas in the near future.' He emphasized that until Google can charge for AI in the same way it used to charge for search ads, all capital expenditure forecasts will look more like a 'bill than an ambition.'
The rapid build-up of AI infrastructure has driven the firm's capital expenditures to record levels. The company is working to modernize popular products such as Search, YouTube, and Gmail using AI. However, these efforts have not yet generated the revenue investors desire to justify all these expenses.
Total Google services revenue in the third quarter was $96.3 billion, falling short of the projected $98.4 billion. YouTube ad revenue was also lower than expected, reaching $11.2 billion. Meanwhile, Google's commitments in the AI sector are becoming increasingly expensive. By the end of the third quarter, Google's future obligations for acquiring resources such as computing power and energy reached $924 billion. Upcoming obligations, such as data center leases that have not yet begun, amount to $152 billion, bringing the company's total future liabilities to a sum significantly exceeding $1 trillion.
The company recorded negative free cash flow for two consecutive quarters, something unseen since its IPO. Anders Bylund, an analyst at Motley Fool, noted that 'search still generates the bulk of Alphabet's cash flow, and two consecutive quarters of negative free cash flow show that the pure math of AI is not working correctly right now.'
Alphabet announced in July that capital expenditures for the year could reach $205 billion, more than double last year's spending. AI requires enormous computational power, and Google is rushing to build data centers to meet the demand for AI from consumers, businesses, and its own employees.
Alphabet's investments have also put pressure on the company's financial results. These investments resulted in an $8.7 billion loss, largely due to Alphabet's stake in SpaceX. This is a sharp reversal from the profit made a year earlier and the unexpected gain in the second quarter, which was primarily driven by SpaceX and investments in a private company later identified by Bloomberg as Anthropic PBC.
The company's net income for the third quarter was $2.12 per share, significantly below Wall Street's estimate of $2.99 per share. A positive point was Google Cloud, viewed as a key indicator of demand for the company's AI products and hosting services. This division reported sales of $30.7 billion and profits of $11.1 billion, surpassing analyst forecasts of $29.1 billion in revenue and $9.8 billion in profit. Among the division's largest clients are startups like Anthropic, which compete with Google in the AI race.
Monteiro wrote that 'the cloud is thriving, but many of its best customers are building assistants that already surpass Google in consumer interaction. Currently, Alphabet is earning more by selling AI to its competitors than by using it itself, and this gap should continue to widen over the next few quarters unless its models change radically and quickly.'
In recent years, Google has sought to reimagine its search engine for the AI era, trying to maintain the user habit of relying on the company's answers despite the growing popularity of chatbots from OpenAI and Anthropic. The company now provides AI-generated answers in response to numerous search queries, which has had serious implications for businesses traditionally reliant on this search giant for traffic and advertising revenue.
Google has worked diligently to create an advantage by generating more personalized answers to questions, leveraging years of user data. However, recently the company has lagged behind Anthropic and OpenAI in developing AI coding tools. Google recently released Gemini 4, which the company claims excels in areas such as coding and cybersecurity, although some employees worry that the company has not fully caught up with its competitors.
Hours before the report began, Google announced another new AI model called Carbon, which could be a response to critics calling for an acceleration of AI development pace. Pichai told analysts during the call that 'we will soon have more models, including more efficient versions, to help developers optimize speed and cost and deploy them among our billions of users.'