Alphabet Shares Drop After Search Revenue Shortfall

Alphabet shares fell 10 percent in after-hours trading on Wednesday following third-quarter results that showed advertising revenue missing analyst estimates by $1.4 billion. The parent company of Google reported total revenue of $127.6 billion for the quarter ended September 30, compared with the $128.2 billion analysts had forecast, according to LSEG data.

The company reported negative free cash flow of $9.1 billion. Analysts had expected the figure to come close to breaking even. It marked the second consecutive quarter of negative cash flow for a company that had been one of the tech sector's largest cash generators.

Alphabet burned $5.9 billion last quarter as it expanded cloud capacity and funded AI development. It was the first time the company posted negative free cash flow in its 22 years as a public company. Net income available to common shareholders fell 25 percent to $26.17 billion, and adjusted earnings per share of $2.67 fell short of the $3.02 analysts had projected.

Google Cloud revenue more than doubled to $30.71 billion, exceeding estimates. The unit's backlog reached $561 billion, and Alphabet expects to recognize more than 55 percent of that amount as revenue within 24 months, chief financial officer Anat Ashkenazi told analysts. She said building up inventory of tensor processing units would further weigh on free cash flow. Ashkenazi also said she expected near-term margin pressure from the use of third-party cloud capacity.

Chief business officer Philipp Schindler attributed a larger-than-expected slowdown in search advertising growth to increased use of AI Mode, a chatbot interface for the search engine. He said Google would begin rolling out advertisements in AI Mode to international markets. Revenue from ads came in at $82 billion, below the $83.4 billion analysts had forecast.

Alphabet plans to raise capital expenditures from this year's forecast of $195 billion to $205 billion in 2027, Ashkenazi said. Executives did not provide a figure for 2027 spending. "A $300-billion (capex) number could potentially scare the market because free cash flow now is finally negative," said Jeremy Saltsburg, senior investment officer at Check Capital.

Dave Wagner, portfolio manager at Aptus Capital Advisors, said investors are watching search performance closely. "In a market worried about AI cannibalising the franchise, investors need to see search accelerating, not decelerating," Wagner said. "Cloud is carrying the story, but until search shows AI is additive, the stock's probably going to trade lower."

Microsoft reported results the same day and its shares rose more than 5 percent on positive free cash flow that exceeded analyst estimates. Alphabet, Microsoft, Amazon and Meta are projected to spend more than $700 billion combined in 2026 on AI data centers, chips and networking capacity.

Google unveiled a new Gemini 4 Carbon model earlier Wednesday, before the earnings report. CEO Sundar Pichai said on the call that this meant the company was again "leading at the frontier." Bernstein analysts asked in a note afterward whether Google had rushed the deployment of Gemini 4 models in response to softer financial metrics and whether the models are ready for commercial deployment. Shares fell 10 percent in after-hours trading.