Alphabet shares plunge nearly 12% as AI spending and slowing search growth overshadow cloud boom

Alphabet shares plunged nearly 12% on Thursday, October 29, putting Google's parent company on course for its worst trading session in more than two decades after disappointing quarterly earnings exposed the mounting financial burden of its artificial intelligence investments.

The selloff followed a rare earnings miss, with investors particularly concerned about slowing growth in Google's search advertising business and a sharp deterioration in free cash flow, despite exceptional growth in cloud computing.

The decline also weighed on the Nasdaq Composite, reflecting Alphabet's considerable influence on the technology-heavy index.

Earnings fall short of expectations

Alphabet reported third-quarter revenue of $127.58 billion, up 25% from a year earlier but below analysts' expectations of approximately $128.2 billion.

Net income fell 25% to $26.17 billion, while earnings per share declined to $2.12 from $2.87 a year earlier, missing forecasts of $3.02.

Google's advertising revenue reached $82.01 billion, falling short of expectations near $83.5 billion.

More concerning was the slowdown in search revenue growth to 12%, compared with 17% in the previous quarter, raising questions about the impact of AI-powered search alternatives on Google's core business.

AI spending drives cash flow into negative territory

Alphabet spent $51.36 billion on capital expenditures during the quarter, more than double the amount recorded a year earlier.

Free cash flow fell to negative $9.07 billion, compared with negative $5.9 billion in the previous quarter.

The company maintained its 2026 capital spending forecast of $195 billion to $205 billion, while warning that investment would increase significantly in 2027.

The scale of these commitments has intensified concerns about how quickly AI investments can generate sufficient returns.

Google Cloud offers little relief

Google Cloud revenue surged 103% to $30.71 billion, supported by demand for AI infrastructure and enterprise services.

Operating profit from the division more than tripled to $11.1 billion, demonstrating the commercial potential of Alphabet's expanding cloud business.

Nevertheless, the strong performance failed to offset disappointment elsewhere, particularly in search advertising, which remains central to the company's profitability.

Investors are increasingly questioning whether AI will strengthen Google's existing business or gradually undermine its traditional advertising model.

The selloff illustrates a broader shift in market sentiment: rapid AI revenue growth is no longer enough to satisfy investors when capital spending continues to accelerate and free cash flow deteriorates.