Shares of Google’s parent company, Alphabet, plummeted 10 percent after the third-quarter results were released. Despite 25 percent revenue growth, persistently sky-high AI investments and negative free cash flow appear to be causing concern among investors.
The revenue figures were extremely positive: Alphabet reported a 25 percent year-over-year increase to $127.58 billion. Analysts, however, had expected approximately $128 billion. In after-hours trading, the stock subsequently dropped by more than 10 percent, erasing nearly $400 billion in market value.
Profits were also disappointing. Net income fell from $34.98 billion to $26.17 billion, resulting in earnings per share of $2.12 compared to an expected $3. A revaluation of investments, including the stake in SpaceX, resulted in an additional loss of $8.66 billion.
Cash flow sinks deeper into the red
However, free cash flow is the main cause for concern. It stood at minus $5.86 billion in the second quarter and has now dropped to minus $9.07 billion. From July through September alone, Alphabet spent $51.36 billion on capital expenditures, primarily for data centers and hardware. For all of 2026, this figure is expected to reach up to $205 billion. In April, the company had estimated that figure at $175 to $185 billion. To fund all of this, Alphabet is increasingly relying on borrowed money. It had previously raised $80 billion for the further expansion of its own AI infrastructure.
Investors are now focusing primarily on which companies can fund their AI spending from their own resources. Microsoft was rewarded when it demonstrated that it could largely finance its expansion internally. Google should be able to do the same to a certain extent, especially with further growth in its own cloud business. But the services to which it historically owes its growth are actually suffering from the new AI reality.
AI is eroding search advertising
As a result, Alphabet’s advertising division fell short of expectations. It generated $82.01 billion, compared to an expected $83.5 billion. Search brought in $63.35 billion and YouTube $11.21 billion. AI-generated search results currently generate less advertising revenue than traditional search queries, despite their growing popularity.
Chief Business Officer Philipp Schindler acknowledged that the growing popularity of AI Mode played a role in the slower growth of search revenue. Additionally, Google isn’t the only platform for AI-generated search results. For example, OpenAI, Anthropic, and Meta all offer assistants on their own platforms or integrated into other applications that allow users to compare products, make purchases, and simply look up information.
The bright spot, therefore, is Google Cloud, whose revenue more than doubled. It is, after all, the infrastructure on which all the results of these investments ultimately land and must generate demand. In the first quarter, the Cloud division grew by 63 percent. According to CEO Sundar Pichai, the Gemini app now has 1 billion users.
Just before the earnings report, Google also introduced the Gemini 4 Carbon model. It is not yet available, but it is undoubtedly a strategically timed announcement designed to generate some positive sentiment.
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