Alphabet shares plunge 10% after Google parent misses profit estimates, AI costs mount

Google parent Alphabet’s shares fell more than 10 per cent in extended trading on Wednesday after the technology giant missed Wall Street’s third-quarter profit and revenue estimates. Heavy investments in artificial intelligence pushed its free cash flow further into negative territory, even as its cloud business recorded triple-digit growth.

Alphabet reported negative free cash flow of $9.07 billion for the July-September quarter, compared with a cash outflow of $5.9 billion in the previous quarter. Analysts had expected the company to come close to breaking even, according to data compiled by LSEG.

Chief Executive Officer Sundar Pichai said that Alphabet was now operating at a $500 billion annual revenue run rate, with revenue growing 25 per cent year on year.

“Our AI investments are driving overall Search query growth, including commercial queries,” Pichai said in a post on X following the results. He added that the year-on-year growth rate in Search queries was the highest in five years.

The company also signalled that its spending plans would remain aggressive. Chief Financial Officer Anat Ashkenazi said capital expenditure would increase significantly in 2027, while the forecast for this year remained unchanged.

Alphabet misses profit and revenue estimates

Alphabet’s revenue rose 25 per cent year on year to $127.6 billion in the third quarter. However, the figure fell short of analysts’ estimate of $128.2 billion.

More from Business

Net income available to common shareholders declined 25 per cent to $26.17 billion, while adjusted earnings per share came in at $2.67, below the Wall Street estimate of $3.02, according to LSEG data.

Google’s advertising business was a key source of weakness. Advertising revenue rose to $82.01 billion but missed analysts’ expectations by about $1.41 billion.

The company is under pressure to show that AI-powered search experiences can sustain user engagement and generate revenue as consumers increasingly turn to chatbots and other AI tools for information.

AI investments push cash flow deeper into negative territory

Alphabet’s spending on AI infrastructure and research drove its cash flow further into negative territory for a second consecutive quarter.

The company reported a $7.66 billion operating loss under “Alphabet-level activities”, a category that primarily reflects expenses related to AI research and development.

Capital expenditure reached $51.4 billion during the quarter, more than double the $24 billion recorded a year earlier. The spending has been driven largely by investments in data centres and AI chips.

Ashkenazi said capital expenditure would rise significantly again in 2027. She also warned of near-term margin pressure from the use of third-party cloud capacity.

Alphabet, Microsoft, Amazon and Meta are projected to spend well over $700 billion collectively in 2026 on AI data centres, chips and networking infrastructure.

Google Cloud revenue more than doubles

Google Cloud emerged as one of the strongest performers in the quarter, with revenue surging 103 per cent year on year to $30.71 billion, beating analysts’ expectations.

The business has benefited from rising demand for AI infrastructure, cloud computing and enterprise AI services. Companies across industries are signing multi-year agreements to access computing capacity and deploy AI applications.

Google Cloud’s operating income more than tripled to $11.12 billion from $3.59 billion a year earlier, according to the company’s results.

Pichai said demand for Google’s AI infrastructure and solutions had been particularly strong. He also said the company’s first-party model application programming interfaces, or APIs, were processing nearly 32 billion tokens per minute, up 40 per cent from the previous quarter.

Tokens are the units of text and other data that AI models process when responding to prompts or carrying out tasks. The increase points to rising usage of Google’s AI models and services.

Google Cloud chief Thomas Kurian said sales of the company’s tensor processing units, or TPUs, had become a meaningful contributor to the business. These chips are designed to handle AI workloads and compete with Nvidia’s graphics processing units.