Alphabet shares plunge over 10% as Google's AI search struggles to make money

Alphabet's stock experienced a significant decline of over 10% in after-hours trading, as disappointing earnings and slower search growth overshadowed its thriving cloud business. Despite a 25% increase in quarterly revenue to $127.6 billion, earnings per share missed expectations, falling to $2.12 from an estimated $3.01. Net income also dropped to $26.2 billion, although a $8.7 billion loss on equity investments dampened the overall performance.

Capital expenditure surged to $51.4 billion, more than double the $24 billion spent the previous year. Alphabet maintained its forecast for full-year capital expenditure between $195 billion and $205 billion, while free cash flow remained negative at $9.1 billion. CEO Sundar Pichai stated that Alphabet should view these figures as part of a long-range planning process rather than a short-term allocation exercise.

Google's AI Search mode, however, is struggling to generate sufficient advertising revenue from the increased queries. The monetization of AI Mode queries is currently lower than Google's traditional search engine, although CEO Pichai remains optimistic about its future potential. Chief Business Officer Philipp Schindler cited currency movements, advertiser spending changes, and lower query growth as contributing factors to the slowdown in search revenue growth.

Despite this, Schindler believes AI search will become a significant revenue generator over time. Search revenue grew by 12% compared to the previous quarter, while Google Cloud revenue more than doubled to $30.71 billion, surpassing analysts' expectations. The results have fueled concerns about the AI bubble, with Citadel founder Ken Griffin warning that investors might be in a speculative bubble. Meta is also planning a $95 billion stock offering to finance its own AI ambitions.