Alphabet stock sinks as search woes cause revenue miss, cash burn worsens

Alphabet's parent company, Google, reported disappointing quarterly results as its search advertising business underperformed and cash burn intensified due to increased investments in artificial intelligence (AI). The company's shares fell by 10% following the market close, with investors concerned about the financial implications of the AI expansion and the potential slowdown in the dominant search engine's growth.

Google Cloud revenues more than doubled during the quarter, providing a glimmer of hope, but the sector still faced investor skepticism about the impact of AI on the franchise. Dave Wagner, portfolio manager at Aptus Capital Advisors, emphasized that investors were looking for search advertising to accelerate, not decelerate, as a sign of growth.

The company reported negative free cash flow of $9.1 billion, falling short of expectations of breakeven. This marked the first time in 22 years since Alphabet went public that it experienced negative cash flow. Total revenue missed Wall Street targets, with a 1.4-billion dollar shortfall in advertising.

Alphabet's aggressive efforts to bolster cloud capacity and fund AI development had led to a significant increase in cash burn to $5.9 billion last quarter, a first in the company's history as a public entity. The management aimed to boost cloud capacity and fund AI development, resulting in a 22-year low of negative cash flow.

Total revenue fell slightly short of analyst estimates, with Google Cloud outperforming expectations but not enough to offset the $1.4-billion miss in advertising. The company's management planned to increase capital expenditures from the current forecasts of $195 billion to $205 billion by 2027, causing concern among investors.

While rivals like Microsoft reported positive free cash flow that surpassed analysts' expectations, Alphabet's net income available to common shareholders fell by 25% to $26.17 billion, and adjusted earnings per share missed targets by a significant margin of $3.02. The main concern for investors lies in the huge costs of AI buildout, with worries over potential overspending and falling behind competitors.