Alphabet, the parent company of Google, suffered its largest-ever stock market decline on record, losing approximately US$511 billion in market value after disappointing advertising and search revenue intensified concerns about the impact of artificial intelligence on its core business.
The company’s shares fell more than 13 per cent to US$281.37 in early New York trading, wiping out the value after Alphabet reported third-quarter sales, excluding payments to distribution partners, of US$111.2 billion, below analysts’ expectations. Advertising revenue from Google Search and other channels, which accounts for roughly half of the company’s overall income and helps finance its artificial intelligence investments, also missed forecasts, recording its slowest growth in five quarters.
The results exposed growing tensions between Alphabet’s substantial investment in AI infrastructure and its ability to generate revenue from the technology. JPMorgan analysts, including Doug Anmuth, said the market reaction demonstrated the limited tolerance investors had for disappointing core business performance from technology companies committing hundreds of billions of dollars to AI infrastructure.
Chief Business Officer Philipp Schindler acknowledged during an earnings call on Wednesday that the growing popularity of AI Mode, a new feature within Google Search, had affected the company’s results. AI-generated queries currently have “lower monetization”, he said, although Google was optimistic about introducing more advertising into the feature.
The development has intensified concerns that consumers increasingly using rival AI services, including ChatGPT and Claude, could reduce their reliance on conventional search engines and weaken Google’s advertising business. For years, Google executives have maintained that AI chatbots and related features would not significantly undermine its search operations.
Chief Executive Officer Sundar Pichai now faces mounting pressure to demonstrate that the company’s AI strategy can generate sufficient returns to justify its escalating expenditure. Alphabet’s future commitments to acquire resources such as computing capacity and energy reached US$924 billion by the end of the third quarter. Additional obligations, including leases for data centres that have yet to commence operations, amounted to US$152 billion, taking total future commitments well beyond US$1 trillion.
Google’s capital expenditure has risen sharply as it builds data centres and computing infrastructure to support AI services for consumers, businesses and its own employees. Alphabet said in July that its capital spending could reach US$205 billion this year, more than double the previous year’s expenditure.
However, the investment has yet to produce the revenue growth investors expect. Google’s overall services revenue reached US$96.3 billion, below analysts’ estimates of US$98.4 billion, while YouTube advertising revenue of US$11.2 billion also fell short of projections.
Alphabet recorded negative free cash flow for the second consecutive quarter, an unprecedented development for the company since it went public. Its third-quarter earnings were US$2.12 per share, significantly below Wall Street’s estimate of US$2.99. Equity investments also weighed on results, recording an US$8.7 billion loss, largely associated with Alphabet’s investment in SpaceX.
Google Cloud provided the strongest performance in the results, reporting revenue of US$30.7 billion and profit of US$11.1 billion. Both figures exceeded analysts’ expectations of US$29.1 billion in revenue and US$9.8 billion in profit. The division has become an important indicator of demand for Google’s AI products and hosting services, although some of its major customers, including Anthropic, are also competitors in the AI market.
Thomas Monteiro, senior analyst at Investing.com, described the quarter as a critical test of Alphabet’s ability to commercialise AI. He said the company risked losing ground in core businesses unless it improved its approach to generating revenue from the technology.
Anders Bylund, a technology analyst at the Motley Fool, said search continued to generate most of Alphabet’s cash, while two consecutive quarters of negative free cash flow indicated that its AI investment model was not yet delivering the expected financial returns.
Google has been redesigning Search, YouTube and Gmail to incorporate AI-generated responses and more personalised services. It recently introduced Gemini 4, which the company says performs strongly in areas including coding and cybersecurity, while acknowledging the need to accelerate development in a market where OpenAI and Anthropic have made significant advances.
Hours before its earnings call, Google announced another AI model, Carbon. Pichai told analysts that additional models were forthcoming, including more efficient versions designed to help developers reduce costs, improve speed and deploy services across the company’s billions of users.
