Alphabet shares fall more than 10% after weak third-quarter results
Alphabet stock dropped sharply after quarterly results missed Wall Street expectations, with negative free cash flow and slowing search revenue fueling investor concern about heavy AI spending.
Shares of Alphabet Inc., the parent company of Google, fell more than 10% in premarket trading after the company reported third-quarter results that fell short of Wall Street forecasts. If the decline holds through the close, it would be the largest one-day post-earnings drop in the company's share price history, surpassing a previous record of 9.77%, according to CNBC.
Alphabet reported revenue of $127.6 billion for the three months ended September 30, a 25% increase from a year earlier. Google Cloud revenue rose 103%, and the company said its Gemini app had crossed 1 billion users, making it the fastest-growing product in the company's history. Still, total revenue of $127.58 billion came in below the $128.22 billion analysts had expected, and adjusted earnings per share of $2.67 trailed the $3.02 Wall Street was anticipating.
Two issues appear to be driving the selloff. The first is cash flow. Alphabet posted negative free cash flow of $9.07 billion for the quarter, more than three times the roughly $2.7 billion deficit analysts had projected. The shortfall reflects heavy spending on artificial intelligence infrastructure: capital expenditures tied to AI reached about $51.4 billion, exceeding the roughly $42.3 billion in cash the company generated during the period. Investors typically tolerate large capital spending when a company's income exceeds it, but that is not the case here, and the company reiterated that it expects fiscal 2026 capital expenditures of between $195 billion and $205 billion. Capital spending could reach $300 billion in 2027 as it expands its AI data centers.
The second concern centers on search. Google's search revenue reached about $63.4 billion, up roughly 12%, but missed Wall Street expectations by about $1.5 billion. That shortfall has revived long-standing worries that AI chatbots could erode the traditional search business that has long been the foundation of Google's income. Gemini is not the dominant chatbot on the web, and it faces strong competition from OpenAI's ChatGPT and Anthropic's Claude. If users increasingly turn to those rival tools for answers, the impact on Google's search revenue could be significant in the years ahead.
The market reaction also comes amid broader debate about the economics of AI spending. Federal Reserve Chair Kevin Warsh said at a news conference that AI investment is not insulated from monetary policy, arguing that interest rates affect the broader economy and, by extension, the financing environment for large technology projects. The Fed held its benchmark rate steady at 3.75% to 4% on the same day, citing the need for more economic data as inflation remained elevated. For investors, the central question is whether the returns on AI investment will arrive quickly enough to justify spending on this scale.
At the time of writing, GOOG shares were down about 10.6% at $287.74, a level not seen since April. The drop is significant not only for its size but for what it signals: investors are increasingly asking Alphabet to show a clear return on its AI buildout, and the latest numbers have not yet provided that evidence.
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