Alphabet shares fell more than 10% after the Google parent reported negative free cash flow of $9.07 billion in the third quarter, alongside revenue and earnings that fell short of Wall Street expectations, intensifying investor scrutiny of its heavy investment in artificial intelligence infrastructure.
The company reported adjusted earnings of $2.67 per share, below analysts’ estimates of $3.02, while revenue reached $127.58 billion, against expectations of $128.22 billion, according to estimates compiled by LSEG. Although revenue increased 25% from a year earlier, the results marked Alphabet’s first miss on both revenue and earnings in nearly four years.
Net income fell to $26.17 billion, or $2.12 per share, from $34.98 billion, or $2.87 per share, in the same quarter last year. Free cash flow, which measures the cash remaining after capital expenditure, was negative by $9.07 billion, substantially worse than the $2.70 billion outflow analysts had expected.
Alphabet spent $51.36 billion on capital expenditure during the quarter, below the $55.09 billion forecast by analysts. The spending forms part of the company’s broader push to expand its artificial intelligence capabilities and infrastructure, a strategy that has generated strong growth in its cloud business but increased scrutiny over whether the investment will deliver sufficient returns.
The company maintained its full-year capital expenditure forecast after raising its guidance in the second quarter to between $195 billion and $205 billion, from $190 billion previously. Annual capital expenditure is expected to exceed $200 billion before rising above $300 billion in 2027.
“We continue to expect our capex to increase significantly in 2027, and will provide further details on our Q4 call,” finance chief Anat Ashkenazi told analysts during an earnings call.
Alphabet’s long-term debt also increased sharply, reaching $125.1 billion during the quarter, compared with $21.6 billion a year earlier, an increase of about 479%. Operating income was $40.58 billion, below the $43.19 billion forecast by FactSet.
The results were mixed across the company’s businesses. Google Cloud revenue more than doubled to $30.7 billion, exceeding analysts’ expectations of $28.7 billion, as the division benefited from demand for artificial intelligence products and services. The business has continued gaining market share from larger competitors Amazon Web Services and Microsoft Azure.
“We are seeing extraordinary demand and strong growth from both AI labs, capital markets, financial service institutions, and enterprises,” Google Cloud chief executive Thomas Kurian said in his first public earnings call remarks.
The strength of the cloud division was not enough to offset weaker results elsewhere. Jefferies analyst Brent Thill said on CNBC’s Closing Bell: Overtime that cloud was the only business to exceed expectations, with growth of 103%, while the rest of the company’s results fell short.
Alphabet’s advertising business also delivered mixed results. Search revenue rose 12% to $63.35 billion, below the $64.96 billion analysts had forecast. Chief executive Sundar Pichai said the company’s artificial intelligence investments had helped drive the highest rate of growth in search queries in five years.
The company reported further signs of adoption for its AI products, saying its Gemini app had reached one billion users, making it the fastest-growing product in Alphabet’s history. Pichai also told analysts that demand was strong for its recently launched Argon Gemini model, while its Carbon iteration, announced on Wednesday, outperformed Argon “on almost every domain”, he said.
Alphabet also reported an $8.66 billion loss in the quarter from equity holdings, reversing a $99.03 billion gain in the second quarter that had been fuelled by its stakes in SpaceX and Anthropic.
