What just happened? Alphabet has given investors another reason to worry about whether the AI spending frenzy will ever pay off. Shares in Google's parent fell more than 10% in after-hours trading as disappointing earnings and slower search growth overshadowed its cloud business. In even worse news for its AI ambitions, Google's AI Search mode is struggling to turn extra queries into equivalent advertising dollars.
Alphabet reported quarterly revenue of $127.6 billion, up 25% year over year, but earnings of $2.12 per share missed expectations of around $3.01. Its net income fell to $26.2 billion, though an $8.7 billion loss on equity investments contributed to the decline.
In what has become a familiar sight among tech giants, the spending figures are eye-watering. Capital expenditure reached $51.4 billion during the quarter, more than double the $24 billion spent a year earlier. Alphabet maintained its full-year forecast of $195 billion to $205 billion, while free cash flow was negative $9.1 billion. Google reported its first negative quarterly free cash flow in July.
Despite that obscene amount of money, Alphabet expects capital expenditure to increase significantly again in 2027.
"I would broadly think of all of this as a long-range planning process, not a short-term allocation exercise," said CEO Sundar Pichai.
Chief business officer Philipp Schindler identified AI Mode's lower monetization as one reason search revenue growth slowed. AI Mode currently earns less from its queries than Google's old-school search engine, despite the company's overly aggressive enthusiasm for getting everyone to use it. Exactly how much less AI Mode is earning compared to traditional search wasn't revealed.
Schindler also cited currency movements and changes in advertiser spending, while Pichai said query growth was the strongest in five years. More searches don't automatically translate into more money, of course.
Schindler still believes that AI search will become a big earner.
"On AI Mode, many of these queries are upper funnel queries, allowing us to capture new, high-value commercial intent," he said. "In addition, the majority of AI Mode queries are incremental, creating more monetization opportunities over time."
Search revenue grew 12%, compared with 17% in the previous quarter. Google is expanding AI Mode advertising into additional countries, though it remains to be seen whether that helps close the gap.
There was a familiar bright spot. Google Cloud revenue more than doubled to $30.71 billion, beating the $29.57 billion analysts expected.
Ultimately, though, the results add more fuel to the AI bubble fears. Citadel founder Ken Griffin recently warned that investors are probably in a bubble as businesses struggle to extract consistent value from AI. Meanwhile, Meta is planning a $95 billion stock offering to help finance its own AI ambitions.