Alphabet’s market capitalization dropped by $500 billion on Thursday, with its stock falling over 11%. This marks the company's worst post-earnings stock reaction in its 22-year history and is on track to be the second-largest single-day stock value loss ever, surpassed only by Nvidia's roughly $589 billion loss on January 27, 2025.
The significant decline follows Alphabet's third-quarter earnings report, which revealed a double miss on both earnings per share and revenue for the first time since late 2022. The company also disclosed an accelerated rate of cash expenditure.
Investors expressed concern that the high-margin Search business, which typically funds Alphabet's substantial investments in artificial intelligence, is being affected by AI chatbots. Gil Luria, head of technology research at D.A. Davidson, noted that this quarter might be the one anticipated by those concerned about AI agents diverting business from traditional search engines.
In the third quarter, Alphabet reported total revenue of $127.6 billion, falling short of the estimated $128.2 billion. Net income decreased by 25% to $26.17 billion, and adjusted earnings per share of $2.67 missed the expected $3.02.
While Alphabet's cloud business revenue reached $30.7 billion, exceeding analyst expectations, its services segment, which includes Search, generated $96.3 billion, missing estimates of $98.5 billion. Revenue growth from Google Search was 12% year-over-year, down from 17% in the second quarter and 19% in the first quarter, and it missed forecasts for the second consecutive quarter.
Chief Financial Officer Anat Ashkenazi announced that capital expenditures are projected to increase significantly next year, primarily driven by the AI race, even as the company reported a faster-than-expected depletion of its cash reserves. Alphabet recorded negative free cash flow of $9.07 billion in the third quarter, a worse outcome than the near break-even projections from Wall Street. This follows a negative cash flow of $5.9 billion in the second quarter, the first time the company has reported negative cash flow since its initial public offering in 2004.
Alphabet reported an operating income loss of $7.66 billion in "Alphabet-level activities," which the company attributes largely to AI development. This spending is part of a broader industry trend where companies are investing billions in AI research and computing power to build capacity and offer it to other businesses.
In contrast, Microsoft reported $45.2 billion in capital expenditures for the third quarter, a 30% increase year-over-year but below the $50.67 billion forecast. The company also revised its full-year spending forecast downward to $170 billion. Despite a 27% decrease to $18.63 billion, Microsoft's free cash flow remained positive.
Microsoft's cloud computing sector, Azure, saw a 48% increase, becoming the company's largest business. However, Microsoft's stock fell 1.4% as traders interpreted the slowdown in spending as an indication that AI investments may not yield immediate substantial returns. This also impacted other "neocloud" stocks, with shares of IREN and Nebius falling 4% and 2.8%, respectively. The Nasdaq index fell 1.1% on Thursday, influenced by the decline in Google's Search revenue and its effect on other technology and AI stocks.