TLDR
Alphabet shares fell almost 13 per cent on Thursday in New York, the biggest one-day drop since Google listed in 2004, after the company reported negative free cash flow of US$9.07 billion as AI spending soared and its search business missed forecasts. About US$500 billion was wiped off its market value.
KEY TAKEAWAYS
Alphabet shares fell almost 13 per cent on Thursday in New York, their biggest one-day drop since Google listed in 2004, wiping about US$500 billion off the company's value after it revealed that AI spending had pushed its cash flow into the red.[1] The shares closed at US$283.82, down 12.6 per cent.[3]
The Google owner reported negative free cash flow of US$9.07 billion for the September quarter, far worse than the US$2.70 billion analysts had expected, as capital spending reached US$51.36 billion. It was Alphabet's first miss on both revenue and earnings in nearly four years, with adjusted earnings of US$2.67 a share against forecasts of US$3.02.[2]
The bill keeps growing
Alphabet held its forecast for US$195 billion to US$205 billion in capital spending this year and warned that next year will cost more. "We continue to expect our capex to increase significantly in 2027, and will provide further details on our Q4 call," chief financial officer Anat Ashkenazi told analysts. Long-term debt has climbed to US$125.1 billion from US$21.6 billion a year earlier.[2]
The money is going into the data centres and chips behind Google Cloud and its Gemini models, and that part of the business is growing fast. Cloud revenue more than doubled to US$30.7 billion, ahead of forecasts, and the Gemini app has reached 1 billion users.[2] Investors looked past it. "The cloud business was the only business that beat at 103% growth," Jefferies analyst Brent Thill told CNBC. "Everything else missed."[2]
AI is eating into search
Search, Alphabet's biggest earner, grew 12 per cent to US$63.35 billion, short of the US$64.96 billion analysts expected.[2] Chief business officer Philipp Schindler said the shortfall was partly due to lower monetisation in AI Mode, the chatbot-style search Google is pushing users towards, and that the company is now scaling ads in AI Overviews and AI Mode, including overseas.[1] Google is defending its search business against ChatGPT and Claude while trying not to undercut it with its own AI products.
Microsoft, reporting on the same day, barely moved. It spent US$45.2 billion on capital expenditure and finance leases, below the US$50.67 billion analysts had forecast, and its free cash flow stayed positive at US$18.63 billion.[1] "Microsoft is building out its architecture in a measured way and as such contains fewer surprises," said Ben Barringer, global head of technology research at Quilter Cheviot. "Alphabet, by contrast, saw its share price hit after hours as a result of a fairly messy set of results and a poorly handled earnings call."[1]
Not everyone thinks the search problem is Alphabet's alone. "If it's a problem for Alphabet, it's a problem for any consumer-facing AI agent or LLM as well. And so, it's a problem that I think is ultimately going to be resolved," Rosenblatt Securities analyst Scott Devitt told CNBC. "And when it does, Alphabet, with its 4 billion search customers that become AI customers, is in an enviable position."[1]
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