Key Moments
- Alphabet (NASDAQ: GOOG) shares dropped by more than 10% in premarket trading after third-quarter earnings came in below Wall Street forecasts.
- Google Cloud revenue jumped 103% to $30.7 billion, with operating income more than tripling to $11.1 billion and 18 product lines each generating over $1 billion annually.
- Heavy AI-driven capital expenditures of $51.4 billion in the quarter and $132 billion year-to-date pushed free cash flow further into negative territory.
Search Weakness Weighs on Strong AI and Cloud Momentum
Alphabet (NASDAQ: GOOG) shares were under sharp pressure in premarket trading on Wednesday, sliding more than 10% after the company reported third-quarter results that fell short of Wall Street expectations. A deceleration in advertising revenue from its core web-search business overshadowed robust growth in artificial intelligence-related services.
Advertising sales from Google’s flagship search platform expanded at their slowest rate in five quarters, amplifying investor concerns about the eventual returns from Alphabet’s aggressive AI investment program. On the company’s earnings call, executives said users were adopting its “AI Mode” search experience, but added that these AI-driven queries are being monetized more slowly than traditional search requests.
Earnings Miss Despite Double-Digit Revenue Growth
Group-wide earnings per share came in at $2.12, falling short of Wall Street consensus estimates of $3.02 by $0.90. Revenue increased 25% to $127.6 billion, slightly above expectations of $127.22 billion.
CEO Sundar Pichai told investors that Alphabet has reached a half-trillion-dollar annual revenue run rate, citing accelerating AI adoption across the company’s portfolio. Google Cloud CEO Thomas Kurian said on the call that customers of Gemini Enterprise more than quadrupled their spending year over year, and noted that more than 90% of Fortune 100 companies are using the platform.
Google Cloud Delivers Breakout Performance
Google Cloud was a standout performer in the quarter. Revenue from the division surged 103% to $30.7 billion, while operating income more than tripled to $11.1 billion.
Kurian said the business now includes 18 distinct product lines each generating more than $1 billion in annual revenue, underscoring the breadth of its cloud and AI offerings.
| Metric | Reported | Expectation / Prior Reference |
|---|---|---|
| Group EPS | $2.12 | $3.02 consensus |
| Total Revenue | $127.6 billion | $127.22 billion consensus |
| Google Cloud Revenue | $30.7 billion | Up 103% |
| Google Cloud Operating Income | $11.1 billion | More than tripled |
| Quarterly Capital Expenditures | $51.4 billion | $24 billion a year earlier |
| Year-to-date Capital Expenditures | $132 billion | – |
| Full-year Capex Forecast | $195 billion – $205 billion | $202.21 billion analyst consensus |
| Future Purchase Commitments | $924 billion | – |
AI Model Advances and Search Usage Trends
Pichai also called out advances in Google’s AI models. He said the company’s new Carbon model is outperforming Gemini 4 Argon and is undergoing testing with the U.S. government, with an initial deployment aimed at cybersecurity partners.
According to Pichai, overall search queries are increasing at their fastest pace in five years, even as monetization of newer AI-enabled formats lags behind traditional search ads.
Capital Intensity Rises as Free Cash Flow Turns More Negative
The rapid build-out to support AI capabilities is taking a toll on Alphabet’s cash generation. Capital expenditures in the quarter reached $51.4 billion, up from $24 billion in the same period a year earlier, bringing year-to-date capex to $132 billion. Management reiterated its full-year capital expenditure outlook of $195 billion to $205 billion, a range that is broadly consistent with the $202.21 billion analyst consensus.
The elevated spending pushed free cash flow further into negative territory. Outlays on infrastructure, TPU inventory and an EU fine all contributed to the cash outflow. Alphabet also reported $924 billion in future purchase commitments, highlighting the scale of the investments tied to its infrastructure expansion for AI demand.
In a research note, analysts at Deutsche Bank remarked, “[T]he results raised questions about whether the payoffs will come fast enough to justify the company’s soaring capex spend.”
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