Alphabet's Shares Fell More Than 10% - Rising AI Spending Fuels Investor Concerns

Shares of Google's parent company, Alphabet, fell more than 10% in premarket trading on Wednesday after the company's third-quarter earnings failed to meet analysts' expectations. Investors' attention has shifted in particular to the slowing growth of search advertising revenue and the question of returns on the company's massive investments in artificial intelligence (AI).

Alphabet's adjusted earnings per share came in at $2.12, significantly below Wall Street's forecast of $3.02. At the same time, the company's revenue grew 25% year-over-year, reaching $127.6 billion, slightly above analysts' expectations of $127.22 billion.

The company's advertising revenue growth rate turned out to be the slowest in the past five quarters. During the call with investors, Google's leadership noted that users are actively using the search engine's new feature — AI Mode — though monetizing this type of search is progressing more slowly compared to traditional search.

Nevertheless, CEO Sundar Pichai stated that the rollout of artificial intelligence is accelerating growth across the company's various business lines. According to him, Alphabet's annual revenue is already approaching the $500 billion mark. Google Cloud CEO Thomas Kurian said that Gemini Enterprise customer spending has grown fourfold year-over-year, and more than 90% of Fortune 100 companies are using the platform.

Google Cloud's Growth Is One of the Main Pillars of the AI Strategy

Google Cloud's revenue grew 103% year-over-year for the quarter, reaching $30.7 billion. Operating profit tripled, reaching $11.1 billion. According to Kurian, the company currently has 18 products whose annual sales each exceed $1 billion.

Pichai also highlighted the capabilities of Google's new AI model, Carbon. According to the company, the model surpasses Gemini 4 Argon and is currently undergoing security testing with the involvement of the US government. Its initial rollout is planned with partners working in the cybersecurity field. Pichai also noted that the volume of Google's search queries is growing at its fastest pace in the past five years.

However, the expansion of the AI business is putting growing pressure on the company's financial resources. Capital expenditures reached $51.4 billion in the third quarter, compared to $24 billion in the same period last year. Total expenditures since the beginning of the year have reached $132 billion.

Alphabet left its full-year capital expenditure forecast unchanged at $195-205 billion. This figure is close to analysts' expectations of roughly $202.21 billion.

Investments in infrastructure, growing TPU chip inventories, and the EU fine have further weakened the company's free cash flow position. The company also disclosed $924 billion in future purchase commitments, underscoring the financial scale associated with expanding AI infrastructure.

According to Deutsche Bank analysts, the quarterly results have raised questions about whether Alphabet will be able to generate returns from its growing AI investments quickly enough to justify the sharp increase in capital expenditures.