The market is rewarding AI spending that generates cash and punishing spending that consumes it, judging by Microsoft’s after-hours gain against Alphabet’s slide. For the AI supply chain, Alphabet’s guidance for significantly higher 2027 capex adds to Samsung’s call that chip shortages will deepen, supporting chip and data centre names even as it weighs on Alphabet itself. The search miss is the more lasting concern, as it gives the first concrete evidence for the long-feared risk that AI answers erode Google’s core ad revenue. Expect pressure on wider megacap tech sentiment at the open, with attention turning to Amazon’s results.
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Google Cloud is booming, but investors just learned that AI may be eating search and that the bill for the build-out is now coming out of the cash pile.
Summary:
- Alphabet shares fell more than 9% after hours
- Free cash flow was negative by around $9 billion against breakeven expectations, the second straight quarter of cash burn
- Revenue of around $127.6 billion and ad revenue of around $82 billion both missed, and adjusted EPS of $2.67 missed $3.02
- Google blamed slower search ad growth on greater use of AI Mode and will roll out AI Mode ads internationally
- The CFO said 2027 capex will rise significantly from the 2026 range of $195 billion to $205 billion, and flagged margin and cash flow pressure
- Cloud revenue more than doubled to around $30.7 billion, with a backlog of around $560 billion
Alphabet shares fell more than 9% in after-hours trading after the Google parent reported a miss in its core search advertising business and a sharp deepening in cash burn, as heavy spending on AI infrastructure overshadowed another blockbuster quarter for Google Cloud.
The company reported negative free cash flow of around $9 billion in the third quarter, against analyst expectations that it would come close to breaking even, according to LSEG data cited by Reuters. It was Alphabet’s second straight quarter of negative free cash flow, following a burn of around $6 billion in the previous quarter, the first time in 22 years as a public company that the figure had turned negative.
Revenue of around $127.6 billion fell short of the roughly $128.2 billion consensus. Advertising revenue of around $82 billion missed expectations of about $83.4 billion, more than offsetting a beat in Cloud. Adjusted earnings per share of $2.67 also missed the $3.02 analysts had expected, and net income available to shareholders fell 25% to around $26 billion.
Chief Business Officer Philipp Schindler said search advertising growth slowed more than expected because of greater use of AI Mode, the chatbot-style search interface in which Google is still testing ads. He said Google would begin rolling out ads in AI Mode in international markets. Investors have been watching closely for signs that AI-generated answers could erode traditional search revenue, and one portfolio manager said the stock was likely to stay under pressure until search shows AI is adding to growth rather than taking from it.
Spending concerns added to the pressure. Chief Financial Officer Anat Ashkenazi said capital expenditure would rise significantly in 2027 from this year’s forecast range of $195 billion to $205 billion, though she did not give a figure. She also flagged near-term margin pressure from the use of third-party cloud capacity, and warned that building up inventory of Google’s tensor processing units would weigh further on free cash flow.
Cloud remained the bright spot. Revenue more than doubled to around $30.7 billion, ahead of estimates, and Cloud CEO Thomas Kurian, appearing on the earnings call for the first time, said sales of Google’s TPU chips had become a meaningful contributor. Ashkenazi said the Cloud backlog had grown to around $560 billion, with more than 55% expected to be recognised as revenue within 24 months.
The contrast with Microsoft was stark. Its shares rose more than 5% after the bell, helped by free cash flow that beat estimates. For Alphabet, the next test is the size of its 2027 spending plan, and whether search growth stabilises as ads are rolled out more widely in AI Mode.
This article was written by Eamonn Sheridan at investinglive.com.