Alphabet shares tumble over 12% as AI spending and weak ad revenue weigh on earnings
Alphabet reported a 12% drop in its share price, wiping about $500 billion from its market value after earnings showed lower-than-expected ad revenue and a first quarterly loss of free cash flow linked to AI investments.
Alphabet Inc. saw its stock fall more than 12% on Thursday, erasing roughly $500 billion in market capitalization. The decline followed the company’s third-quarter earnings report, which revealed a miss on advertising revenue and a negative free-cash-flow figure of $9.1 billion, contrary to analyst expectations of near-break-even results.
Revenue for the quarter reached $127.6 billion, slightly below the $128.2 billion forecast, with ad sales at $82 billion versus the anticipated $83.4 billion. While Google Cloud’s revenue more than doubled to $30.71 billion and exceeded estimates, the growth was insufficient to offset the shortfall in the core search advertising business.
"In a market worried about AI cannibalising the franchise, investors need to see search accelerating, not decelerating," said Dave Wagner, portfolio manager at Aptus Capital Advisors. "Cloud is carrying the story, but until search shows AI is additive, the stock’s probably going to trade lower."
Chief financial officer Anat Ashkenazi told analysts that capital expenditures are expected to rise to $205 billion by 2027, up from the current $195 billion forecast, a level that some investors view as potentially unsettling given the negative cash flow. Jeremy Saltsburg of Check Capital noted that a $300-billion capex figure could "scare the market because free cash flow now is finally negative."
Alphabet’s chief executive Sundar Pichai highlighted the launch of the Gemini 4 Carbon model during the earnings call, describing it as keeping the company "leading at the frontier" of AI. Analysts questioned whether the timing of the model’s release was intended to offset weaker financial metrics and whether the technology is ready for commercial use.
The company also reported a $5.9 billion expense for AI and cloud capacity expansion, marking the first quarterly negative cash flow in its 22-year public history. Revenue from the sale of tensor processing units (TPUs) contributed to cloud growth, though CFO Ashkenazi warned that further TPU inventory buildup could increase cash-flow pressure.
By contrast, rival Microsoft posted a share-price increase of more than 5% after reporting positive free cash flow that beat estimates.