Alphabet shares plunge as AI reshapes advertising revenue

Alphabet Inc.'s shares fell about 10% in after-hours trading following the company's third-quarter earnings release, which showed its services division revenue at $96.3 billion, roughly $2 billion short of analysts' $98.5 billion forecast. The shortfall reflects growing concerns that artificial-intelligence-driven search could erode traditional ad revenue.

"Given the abrupt deceleration in digital advertising revenue, investors should be more cautious as that trend may continue going forward," said Gil Luria, head of technology research at D.A. Davidson. He added that the company now faces the "burden of proof" to demonstrate it is not entering a lasting decline as users shift toward AI chat interfaces.

Bob O'Donnell, founder of TECHnalysis Research, noted that many users are performing tasks via chatbots that they previously handled through Google search, suggesting a potential change in online behavior that could affect ad earnings over time.

During the earnings call, analysts asked about the role of ads in AI-generated queries compared with traditional searches. Doug Anmuth, head of internet equity research at JPMorgan, asked whether fewer ads are being shown in AI mode, contributing to the revenue gap.

Google executives acknowledged the dip and said the company is testing ways to monetize AI queries. "The strong growth in AI mode queries had an impact because of the lower monetization we are seeing in AI mode," said Philipp Schindler, chief business officer. He added that early ad experiments in AI mode have shown promising results and are being expanded to more users and queries.