Google shares fell over 10% in after-hours trading following Alphabet's third-quarter results, with the decline potentially wiping out more than $400 billion from Alphabet's market value, marking the biggest single-day loss in the company's history according to The Financial Express. The stock decline reflects mounting pressure on CEO Sundar Pichai to justify the company's massive AI investments, with analysts warning that 'this quarter feels like a moment of truth for Alphabet: Either Pichai and his team fix the way the company monetizes AI, or the giant risks losing its leadership in several of its core businesses in the near future'. The market reaction comes as investors weigh the company's massive AI spending against its financial performance, with the stock movement highlighting the no-win scenario facing Big Tech companies in the current market environment. Nasdaq futures dropped 1% following the earnings announcement, while Microsoft shares rose 3% after beating forecasts with better-than-expected cash flows.
Alphabet's overall revenue increased 25% year-on-year to $127.6 billion in the third quarter, though the figure was slightly below the average analyst forecast compiled by FactSet. Net income fell 25% to $26.2 billion compared with the same period a year earlier, well below analysts' expectations of $37.3 billion according to The Financial Express. Operating income, which does not include investment losses, rose 30% to $40.6 billion, still below Wall Street's forecast of $43.2 billion. Operating margin came in at 31.8%, while diluted earnings per share (EPS) declined to $2.12 from $2.87 in the corresponding quarter last year. Alphabet attributed the decline to an $8.7 billion loss on equity securities, which reduced net income by $6.7 billion. Google's search and advertising sales, which account for roughly half of overall sales, grew 12% year-on-year to $63.4 billion, below analysts' expectations of $64.9 billion, with the growth rate slower than the nearly 20% annual increase recorded earlier in the year. Google's overall services revenue totaled $96.3 billion, below estimates for $98.4 billion, while YouTube advertising sales of $11.2 billion also fell below projections.
Adding to investor concerns, Alphabet Chief Business Officer Philipp Schindler revealed during the earnings call that the growing popularity of AI Mode, a new tab in Google Search, took a toll on the company's results according to The Financial Express. Schindler noted that 'those queries have lower monetization,' though the company remains optimistic about bringing more advertising to that part of the search engine. David Wagner, head of equity at Aptus Capital Advisors, said the slowdown was worrying investors because of the threat posed by AI chatbots to Google's main business. 'Search is where the concern sits,' Wagner said. 'In a market worried about AI chatbots cannibalising its key franchise, investors need to see it accelerating, not decelerating.' Jamie Hannah, deputy head of investments at VanEck, explained that 'The reason why Alphabet is down is because their traditional revenue service of ad generation has been impacted by the very thing which is the AI boom. So it's causing a mix of results for Google.'
Alphabet reported a record cash outflow of $9.1 billion in the third quarter, worse than the negative $5.9 billion reported in the previous quarter and only the second time since Google went public in 2004 that the company reported negative free cash flow for a quarter according to The Financial Express. Google's capital expenditure rose to $51.3 billion in the third quarter, up from $44.9 billion in the previous quarter, with Chief Financial Officer Anat Ashkenazi confirming that capital expenditures could reach up to $205 billion this year, meaning the company could spend up to $73.1 billion in the fourth quarter alone. Alphabet has disclosed more than $1 trillion in future commitments covering data centre purchases, leases, equipment, energy and other expenses, with the company taking on tens of billions of dollars in debt and announcing plans to raise about $85 billion through its first share sale in more than two decades.
Google Cloud emerged as the key growth driver, with revenue more than doubling to $30.7 billion, marking a 103% increase from the year-ago period, according to the latest earnings release. Google Cloud's operating income climbed to $11.1 billion from $3.6 billion in the same quarter last year, with the growth fueled by strong demand for artificial intelligence (AI) infrastructure and solutions, core cloud services, and its tensor processing unit (TPU) systems. CEO Sundar Pichai said AI investments were contributing to growth in overall Search queries, including commercial searches, and added that the year-on-year growth rate in Search queries had reached its highest level in five years. Alphabet extended its streak of double-digit revenue growth to 13 consecutive quarters, with the company announcing that its annual revenue run rate had reached $500 billion. Revenue from Google Services grew 11% to $96.3 billion, supported by the strong performance across both search and cloud segments.
