Alphabet stock drops after profit and sales fall

Alphabet's profit and sales fell short of market expectations in Q3, signaling that the company's massive spending on AI may not be yielding sufficient returns. The company's shares dropped over 10% in after-hours trading following the release of its third-quarter results. Alphabet reported $111.2 billion in sales, excluding partner payouts, for the quarter ending September 30, slightly below the projected $111.3 billion.

The company's net income for the period was $2.12 per share, significantly below the estimated $2.99. Google's race to develop AI infrastructure has led to record spending, and investors are increasingly questioning whether the spending is justified. The search division, a major contributor to Alphabet's revenue, also underperformed.

Alphabet's equity investments resulted in an $8.7 billion loss, a stark contrast to the gains the company made a year earlier. The cloud unit, which provides a key indicator of demand for Alphabet's AI products and services, reported strong sales and profit. However, the company's overall free cash flow was negative for the second consecutive quarter, amounting to $9.1 billion.

Google generated $63.4 billion in revenue from search and related businesses, falling short of the average estimate of $64.9 billion. The company's heavy reliance on advertising and search revenues to fund AI investments is evident as these products evolve to incorporate AI-generated answers. Despite its efforts to reinvent its search engine for the AI age, Google has struggled to keep up with competitors like Anthropic and OpenAI in developing AI coding tools.

The recent release of Gemini 4, claimed to excel in coding and cybersecurity, may not be enough to regain its competitive edge.