Alphabet Shares Fall Over 10% After Earnings Miss and Rising AI Costs

Google parent Alphabet saw its shares fall more than 10% in extended trading on Wednesday after missing Wall Street profit and revenue expectations for the third quarter. The financial results highlighted the heavy financial impact of the company's ongoing artificial intelligence buildout, which significantly accelerated its cash burn.

Chief Financial Officer Anat Ashkenazi stated that capital expenditures driven by AI will increase significantly in 2027, while this year's capex forecast remained unchanged. Ashkenazi also noted that the company expects near-term margin pressure due to the use of third-party cloud capacity.

The tech giant reported negative free cash flow of $9.07 billion for the quarter. According to data compiled by LSEG, this came in well below analyst expectations that the company would come close to breaking even. This marks an increase from the $5.9 billion negative free cash flow recorded in the prior quarter, which was the first time Alphabet had gone negative in its 22-year history as a public company.

Alphabet's cash burn was primarily driven by expenses to boost cloud capacity and fund AI research. The company reported a $7.66 billion operating income loss in its 'Alphabet-level activities,' which it attributed largely to AI research and development expenses.

Total revenue for the third quarter reached $127.6 billion, falling short of analysts' consensus estimate of $128.2 billion. The revenue miss was largely driven by Google's core advertising business, which brought in $82.01 billion, coming in about $1.41 billion short of market expectations.

Net income available to common shareholders declined 25% to $26.17 billion. Adjusted earnings per share came in at $2.67, missing Wall Street targets of $3.02.

Earlier on Wednesday, CEO Sundar Pichai sought to counter the perception that the company had fallen behind in the AI race by announcing the new Gemini 4 Carbon model during the earnings call, telling analysts that Alphabet was once again 'leading at the frontier.'

Revenue at Google Cloud provided a bright spot, exceeding estimates and more than doubling to $30.71 billion for the quarter ended September 30. However, the growth was not enough to offset the shortfall on the advertising side. Cloud chief Thomas Kurian made his debut on the earnings call, highlighting the growing influence of the enterprise-oriented unit. Kurian noted that sales of Google's tensor processing units, which compete with Nvidia's GPU chips, have become a meaningful contributor to the division.

Alphabet, alongside Microsoft, Amazon, and Meta, is projected to collectively spend well over $700 billion in 2026 to expand data center footprints, chips, and high-performance networking capacity. While industry-wide supply bottlenecks for advanced silicon and data-center power have persisted, Alphabet continues to rely on investments in custom tensor processing units and third-party GPUs to expand its service delivery capabilities.

"The recent market reaction to Alphabet's earnings highlights a critical reality for capital-intensive sectors like artificial intelligence. While heavy investments in infrastructure and research are necessary to stay competitive, they introduce substantial short-term pressure on cash flows and profit margins. For growing businesses and major enterprises alike, balancing aggressive innovation with sustainable cash management remains a complex operational challenge." — Dr. Shishir Gupta, Founder & CEO, StartupLanes