Alphabet, Google’s parent company, reported disappointing results on Wednesday, falling short of profit and revenue expectations. The company’s stock plunged over 10% in after-hours trading, primarily due to increased spending on artificial intelligence, which has been accelerating its cash burn.
According to Chief Financial Officer Anat Ashkenazi, capital expenditures related to AI are expected to rise significantly by 2027, while maintaining the current capex forecast for this year. She also mentioned that they anticipate some near-term pressure on profit margins due to the reliance on third-party cloud resources.
In a notable financial blow, the tech giant’s free cash flow showed a negative figure of $9.07 billion, contrary to analysts’ predictions of nearly breaking even, based on data from LSEG.
This financial outcome reflects the considerable expenses tied to AI expansion. Investors are increasingly concerned about the dual risks of overspending and potentially falling behind competitors who might not invest enough.
The company’s cash burn for the quarter was up from $5.9 billion in the previous quarter, marking a significant shift as it was the first time in its 22-year history as a public entity that it reported negative cash flow.
Alphabet’s cash burn has been driven largely by increased cloud capabilities and funding for AI research. The firm recorded an operating income loss of $7.66 billion in its “Alphabet-level activities,” largely due to AI research and development costs.
Total revenue for the third quarter reached $127.6 billion, which was below the analysts’ forecast of $128.2 billion, according to LSEG data.
The revenue shortfall stemmed from Google’s core advertising business, which brought in $82.01 billion—approximately $1.41 billion less than expected.
Net income available to common shareholders decreased by 25% to $26.17 billion. Additionally, adjusted earnings per share were reported at $2.67, falling short of Wall Street’s target of $3.02.
In an effort to mitigate concerns about its standing in the AI sector, Google announced the launch of its new Gemini 4 Carbon model prior to the earnings release. CEO Sundar Pichai asserted during the earnings call that this positioned the company as “leading at the frontier.”
Cloud influence grows
Despite the challenges, revenue from Google Cloud surpassed expectations, more than doubling to $30.71 billion in the third quarter ending September 30. However, this growth wasn’t sufficient to offset the underwhelming performance in advertising.
During the earnings call, Google Cloud chief Thomas Kurian made his first appearance, highlighting the growing importance of this enterprise-focused division within a company historically centered on consumer services.
Kurian noted that sales of Google’s tensor processing units (TPUs), which compete with Nvidia’s GPU chips, had become a significant contributor to the business unit.
As the third-largest cloud services provider worldwide, following Amazon Web Services and Microsoft’s Azure, Google Cloud continues to gain traction in enterprise sectors, bolstered by multi-year cloud and AI infrastructure agreements across various industries like cybersecurity, retail, and finance.
Looking ahead, Alphabet, along with Microsoft, Amazon, and Meta, is expected to collectively exceed $700 billion in spending by 2026 to enhance their AI infrastructure, including data centers, chips, and high-performance networking.
Despite ongoing supply chain challenges for advanced silicon and power for data centers, Alphabet’s investments in custom tensor processing units, alongside third-party GPUs, have strengthened its service delivery capabilities.
