Alphabet, Google's parent company, has suffered its worst day since going public in 2004. After releasing its third-quarter results, its shares plunged by more than 13 percent on Thursday, wiping more than $500 billion off the company's market value. Alphabet had never lost that much money in a single trading day. The turmoil was caused by weaker growth in search advertising and massive spending on artificial intelligence, which is beginning to eat into the company's cash reserves.
Revenue grew less than expected
At first glance, the results do not look bad. Revenue for the period from July to September jumped by a quarter year on year to just under $128 billion. However, analysts had expected a slightly higher figure. After payments to partners were deducted, revenue came to around $111 billion, disappointing the market. Earnings per share fared even worse, falling significantly short of Wall Street estimates.
The result was also dragged down by an $8.7 billion loss on investments in other companies. Alphabet attributed it mainly to its stake in SpaceX, whose shares have struggled since its June stock market debut.
AI search generates lower profits
Google's biggest concern is its own core business. Search revenue, which remains the company's largest source of income, rose by 12 percent to more than $63 billion, but it had grown by 17 percent just one quarter earlier. Search advertising thus slowed by the most in the past five quarters.
Google admitted that its own new feature was partly to blame. Chief Business Officer Philipp Schindler explained that queries in AI Mode, which responds conversationally instead of providing a list of links, are drawing people away from traditional search. However, the company earns less advertising revenue from such responses. Paradoxically, the total number of queries is growing at its fastest pace in five years, which Google CEO Sundar Pichai attributes to artificial intelligence.
The company wants to solve the problem by adding more ads to AI Mode responses. It is gradually beginning to roll them out worldwide, and according to Schindler, initial advertising trials in this mode have shown promise. However, JPMorgan analysts warned that the slowdown in search was sharper than they had expected.
The bill for data centers is growing
While advertising revenue is slowing, spending is running at full speed. Alphabet expects to invest $195 billion to $205 billion in artificial intelligence infrastructure this year, roughly twice as much as last year. Management did not soften its forecast in any way. In the third quarter alone, it spent more than $51 billion on capital expenditures, $6 billion more than in the second quarter.
Even larger figures are hidden in contracts covering the years ahead. Google has contractually committed more than a trillion dollars to computing power, energy, and data center leases.
As a result, the company spent more money than it earned for the second quarter in a row. Free cash flow fell to roughly negative $9 billion, although the market had expected a positive figure. This was only the second time since going public that Google had fallen into negative territory by this measure.
Cloud drives growth while YouTube slows
The bright spot in the report is the cloud division, which provides companies with computing power and artificial intelligence tools. Its revenue more than doubled year on year to nearly $31 billion, while profit exceeded $11 billion, beating analysts' expectations.
YouTube did not fare as well. Advertising revenue rose by 9 percent to $11.2 billion, but it had grown by 13 percent one quarter earlier. Meanwhile, YouTube Music and Premium surpassed 150 million subscribers worldwide, including trial users. The division focused on future projects, which also includes the Waymo robotaxi business, generated $372 million in revenue and lost $2 billion.
Management sought to improve sentiment by noting that the Gemini app is now used by more than a billion people. Google continues to release new models, such as Gemini 4 and Carbon, and is competing for customers with OpenAI and Anthropic.
Markets rattled by Alphabet's borrowing
Alphabet shares fell as low as $281 on Thursday. JPMorgan analysts noted that the results show how little room for error a company has when it spends hundreds of billions on artificial intelligence infrastructure while stumbling in its core business. Even after the plunge, however, Google remains the fourth-most valuable U.S. company, with a market value of more than $3.4 trillion.
The nervousness quickly spread elsewhere. The technology-heavy Nasdaq index lost 1.6 percent in morning trading, while shares of data center chipmakers fell by the same amount. Microsoft also declined despite reporting better results than Alphabet, while shares of construction equipment manufacturer Caterpillar, whose machinery is used to build data centers, plunged by 9 percent.
Alphabet is no longer funding further construction solely from its profits. During the quarter, it sold nearly $29 billion in bonds and roughly another $12 billion in new shares. In June, it had already raised almost $80 billion to expand its artificial intelligence infrastructure.
Sources: bloomberg.com and bbc.com
