Alphabet shares drop 10% after search ad revenue misses targets

Alphabet shares fell 10 percent in after-hours trading on Wednesday following a report that showed the company’s core search business slowing down while its artificial intelligence spending accelerated. The tech giant posted negative free cash flow of $9.1 billion for the third quarter, a sharp departure from its history as a consistent cash generator. Investors reacted with alarm to the combination of a revenue miss in advertising and a heavy price tag for building out AI infrastructure.

The company had long been viewed as one of the most reliable sources of cash in the technology sector. This quarter, however, aggressive efforts to boost cloud capacity and fund AI development pushed the bottom line into the red. It is the first time in 22 years since becoming a public company that Alphabet recorded a negative quarter in this manner. This follows a second consecutive period of negative cash flow, signaling a structural shift in how the company allocates its resources.

Total revenue for the quarter ended September 30 came in at $127.6 billion. That figure fell short of the $128.2 billion estimated by analysts, according to LSEG data. The shortfall was driven by a $1.4 billion miss in advertising revenue. Ad sales totaled $82 billion, which trailed the expected $83.4 billion. This deceleration in the market-dominating search engine raised concerns among holders of the stock.

Philipp Schindler, the company’s chief business officer, explained the drop in search advertising growth on an earnings call. He attributed the slowdown to the increased use of AI Mode, a chatbot interface for the search engine. Alphabet is currently experimenting with advertisements within this new interface. Schindler said the company would begin rolling out these ads to international markets in the coming months.

To counter the weak ad numbers, executives emphasized the strength of the Google Cloud unit. Revenue for that division more than doubled to $30.71 billion, exceeding analyst estimates. Thomas Kurian, CEO of Google Cloud, appeared as a speaker on the call to discuss the growth. He noted that sales of Google’s tensor processing units have become a meaningful contributor to the business. These chips compete directly with Nvidia’s GPU products.

Alphabet started recognizing revenue from direct sales of what it calls TPU Systems last quarter. This category includes the chips along with associated hardware and software. However, Anat Ashkenazi, the company’s chief financial officer, warned that building up TPU inventory would further pressure free cash flow in the near term. She also predicted margin pressure from the use of third-party cloud capacity.

The cloud backlog has grown to $561 billion. Alphabet expects to recognize more than 55 percent of that amount as revenue over the next 24 months. The company is the third-largest cloud services provider globally, following Amazon Web Services and Microsoft’s Azure. It has expanded enterprise commitments through multi-year deals in cybersecurity, retail, and financial services.

Ashkenazi told analysts that the company plans to increase 2027 capital expenditures from this year’s forecast of $195 billion to $205 billion. While executives did not provide a specific number for 2027 outlays, investors expressed nervousness about the scale of the jump. Jeremy Saltsburg, a senior investment officer at Check Capital, noted that a $300 billion capex figure could scare the market given the current negative free cash flow.

Net income available to common shareholders declined by 25 percent to $26.17 billion. Adjusted earnings per share came in at $2.67, missing the Wall Street target of $3.02. In contrast, rival Microsoft saw its shares rise more than 5 percent on Wednesday. Microsoft’s positive free cash flow outstripped analyst estimates, offering a different financial picture for its investors.

Earlier on Wednesday, Google unveiled the new Gemini 4 Carbon model. CEO Sundar Pichai stated on the call that the company remains leading at the frontier of AI. Analysts at Bernstein questioned whether Google rushed the deployment of these models to offset softer financial metrics. They also asked if the models are ready for commercial deployment.