Alphabet Shares Tumble as AI Costs Mount and Revenue Falls Short
Google's parent company faces investor concerns over increased cash burn and a miss on third-quarter revenue expectations.
Alphabet, the parent company of Google, saw its shares drop by more than 10% in extended trading on Wednesday after reporting a third-quarter revenue miss and a significant increase in its cash burn, largely driven by accelerated artificial intelligence spending.
The tech giant announced total revenue of $127.6 billion for the quarter ending September 30, falling short of analysts' estimates of $128.2 billion. The core advertising business, which generated $82.01 billion in revenue, was approximately $1.41 billion below expectations.
Net income available to common shareholders decreased by 25% to $26.17 billion, and adjusted earnings per share of $2.67 did not meet Wall Street targets of $3.02. The company's capital expenditures, primarily fueled by AI initiatives, are projected to increase significantly in 2027, although the forecast for the current year remained unchanged. Chief Financial Officer Anat Ashkenazi also anticipates near-term margin pressure due to the use of third-party cloud capacity.
Alphabet reported a negative free cash flow of $9.07 billion, a stark contrast to analyst expectations of near breakeven. This negative cash flow represents an increase from $5.9 billion in the previous quarter, which marked the first time in the company's 22-year history as a public entity that it experienced negative free cash flow. The intensified cash burn is attributed to substantial spending aimed at bolstering cloud capacity and advancing AI research and development.
In an effort to counter perceptions of falling behind in the AI race, Google announced its new Gemini 4 Carbon model earlier on Wednesday. CEO Sundar Pichai told analysts during the earnings call that this development signifies Google is once again "leading at the frontier."
Cloud Growth and Competition
Despite the overall revenue shortfall, Google Cloud exceeded estimates, more than doubling its revenue to $30.71 billion in the third quarter. This performance, however, was insufficient to offset the weaker results from the advertising segment. The increased influence of the enterprise-focused cloud unit was highlighted by the debut of its chief, Thomas Kurian, on an earnings call.
Kurian noted that sales of Google's Tensor Processing Units (TPUs), designed to compete with Nvidia's GPUs, have become a significant contributor to the cloud business. As the third-largest global cloud services provider, behind Amazon Web Services and Microsoft Azure, Google Cloud has been expanding its enterprise commitments through multi-year infrastructure deals in areas like cybersecurity, retail, and financial services.
Industry projections indicate that Alphabet, along with Microsoft, Amazon, and Meta, are collectively expected to spend upwards of $700 billion by 2026 on expanding AI data center footprints, developing chips, and enhancing high-performance networking capabilities. Alphabet's investment in custom TPUs, alongside third-party GPUs, has helped to enhance its service delivery capabilities, even amidst ongoing industry-wide supply bottlenecks for advanced silicon and data center power.