Alphabet shares fall after revenue miss, cash burn worsens

Google parent company Alphabet fell short of Wall Street's profit and revenue expectations, resulting in a more than 10% drop in its shares during extended trading on Wednesday. Chief Financial Officer Anat Ashkenazi revealed that AI spending would lead to significant increases in capital expenditures in 2027, despite the company's forecast remaining unchanged for the current year.

She also predicted near-term margin pressure due to the utilization of third-party cloud capacity. Alphabet reported a negative free cash flow of $9.07 billion, in contrast to analysts' expectations that it might come close to breakeven. The results were largely driven by the high costs of AI expansion, with investors worried about potential overspending and the risk of falling behind competitors if they did not invest enough.

Cash burn increased to $5.9 billion in the most recent quarter, marking the first time the company had experienced a negative cash flow in its 22-year history as a public entity. The decline was primarily attributed to expenses related to AI research and development, which accounted for $7.66 billion in operating income loss. Total revenue for the third quarter was $127.6 billion, falling short of the $128.2 billion estimated by analysts.

The ad business, Google's core, generated $82.01 billion in revenue, roughly $1.41 billion below expectations. Net income available to common shareholders dropped by 25% to $26.17 billion, while adjusted earnings per share missed the target of $3.02, falling to $2.67. Google sought to address concerns about falling behind in the AI race by unveiling its new Gemini 4 Carbon model, which CEO Sundar Pichai claimed would once again position the company at the forefront of the technology.

Revenue from Google Cloud exceeded expectations and more than doubled to $30.71 billion, but it was not sufficient to compensate for the underperformance in advertising. Cloud chief Thomas Kurian made his first appearance on the earnings call, symbolizing the growing influence of the enterprise-focused business unit within Alphabet, traditionally dominated by consumer products.

Kurian noted that sales of Google's tensor processing units (TPUs), which compete with Nvidia's GPU chips, had become a significant contributor to the Cloud business. As the third-largest cloud service provider globally, behind Amazon Web Services and Microsoft's Azure, Google Cloud has been expanding its enterprise commitments through multi-year cloud and AI infrastructure deals in cybersecurity, retail, and financial services.

Industry projections indicate that Alphabet, Microsoft, Amazon, and Meta are set to collectively spend more than $700 billion in 2026 to expand their AI data center footprint, chips, and high-performance networking capacity. Despite ongoing supply bottlenecks for advanced silicon and data-center power, Alphabet's investments in custom tensor processing units alongside third-party GPUs have bolstered its service delivery capabilities.