Why Google’s advertising business is worrying investors amidst an AI stock selloff

Alphabet's parent company, Google, experienced a significant drop in stock value recently, losing around $500 billion in market capitalization. This decline is primarily attributed to the company's core search advertising business, which has suffered a hit due to the introduction of AI-powered search features. Within these features, AI Mode, a conversational AI search interface, has generated less advertising revenue compared to traditional search, contributing to a slowdown in revenue growth.

During Alphabet's earnings call on October 28, 2026, senior vice president and chief business officer Philipp Schindler noted that the strong growth in AI Mode queries was impacted by lower monetization. However, he remained confident about Google's trajectory in scaling advertising within AI Mode and AI Overviews. Notably, enterprise customers have embraced Google's AI offerings, with Google Cloud revenues increasing by 103% in Q3 2026 compared to the same period last year.

The AI boom has drawn attention to a critical issue: major AI companies are investing heavily in data centers and compute power, even as questions arise as to whether the revenues generated will justify these investments. Google, in particular, faces challenges as it integrates AI features into its core search business, which could potentially cannibalize its existing revenue streams. Additionally, competition from AI-powered chatbots like ChatGPT and Claude poses further threats to Google's advertising business.