Alphabet reports AI search revenue lagging behind traditional ads amid heavy infrastructure spending

Alphabet's shares fell nearly 10% on Wednesday after the company disclosed that revenue from its AI-powered "AI Mode" searches is growing more slowly than revenue from traditional search ads. The third-quarter report showed a 12% year-over-year increase in overall search revenue to $63.25 billion, below the 14.5% growth recorded in the same period last year. Chief business officer Philipp Schindler attributed the slowdown to "lower monetization we were seeing in AI Mode" during the earnings call.

The company said it spent $51.4 billion on infrastructure in the quarter, with roughly two-thirds allocated to servers and networking equipment and the remainder to new data-center construction. Net income fell to $26.17 billion from $35 billion a year earlier, reflecting the impact of the higher outlays.

Schindler argued that AI-mode queries, which are often "upper funnel" and represent new commercial intent, could eventually generate more revenue as they become incremental. Google has begun displaying ads alongside AI-mode results worldwide after a U.S. test, but the new format has not yet matched the profitability of the legacy search business, which still accounts for just under half of Alphabet's $125.8 billion quarterly revenue.

Google Cloud reported $24.75 billion in revenue but warned that insufficient capacity is forcing the firm to offload some workloads to third-party providers, a move that could pressure future margins. Cloud chief Thomas Kurian noted that over 100 companies are using Google's TPU silicon under committed contracts, and the firm expects to recognize revenue from TPU sales in upcoming quarters.

CEO Sundar Pichai highlighted the rapid adoption of the Gemini app, which reached a billion users faster than any previous Google product, and said the company is accelerating development of agentic AI tools for business customers, emphasizing high standards for security, safety, and governance. He added that similar features will be extended to Search and the Gemini app, though no timeline was given for their rollout in search.

Alphabet reaffirmed its capital-expenditure outlook of $195-$205 billion for the year and indicated plans to increase spending significantly in 2027.