Google shares crash 13% after $9 billion cash burn sparks AI spending fears

Revenue increased 25% to $127.58 billion from $102.35 billion a year earlier, although it fell short of the $127.97 billion expected by analysts surveyed by FactSet.For live updates on US Markets, click hereAlphabet reported earnings of $2.12 per share, compared with $2.87 a year earlier. Its adjusted earnings of $2.67 per share also missed Wall Street expectations of around $3.02, according to LSEG data.Live EventsThe disappointing earnings performance came despite strong demand for Google's cloud computing and AI services, which helped the company deliver its 13th consecutive quarter of double-digit revenue growth.Alphabet's quarterly earnings were affected by an $8.7 billion loss on equity investments, which reduced reported profitability.AI spending sends cash flow into negative territoryInvestors were also concerned about the growing cost of Alphabet's AI investments.

The company reported negative free cash flow of $9.1 billion during the September quarter, compared with analysts' expectations that cash flow would remain close to breakeven.Capital expenditure surged to $51.4 billion, more than double the amount spent in the corresponding quarter last year, as Alphabet expanded its data centres, computing infrastructure and AI capabilities.The September quarter marked the company's second consecutive quarter of negative free cash flow, following an outflow of $5.9 billion in the June quarter.Alphabet has maintained its capital expenditure guidance of $195 billion to $205 billion for 2026.

CFO Anat Ashkenazi indicated that spending would increase significantly in 2027 as the company continues to expand its AI infrastructure.The prospect of sustained spending has raised questions about how quickly Alphabet can generate returns from its investments, particularly as competition intensifies across the AI industry. Revenue from Google Search and other advertising increased 12% year-on-year to $63.35 billion, slowing from 17% growth in the preceding quarter.YouTube advertising revenue rose 9% to $11.21 billion, while total Google advertising revenue increased to $82.01 billion.The advertising business missed market expectations, adding to concerns that changing user behaviour and the growing adoption of AI-powered search tools could affect Google's traditional advertising model.Alphabet has been expanding AI-generated answers across Google Search, including its conversational AI Mode, as more users turn to AI assistants for information.However, monetisation of these services remains an important challenge as traditional search advertisements continue to account for a substantial portion of the company's revenue.Google Cloud revenue doublesGoogle Cloud remained the strongest-performing business during the quarter, with revenue surging 103% year-on-year to a record $30.71 billion from $15.16 billion.

Growth was supported by demand for AI infrastructure, enterprise AI solutions and Google's cloud computing services.The company also reported increasing demand for its custom tensor processing units, or TPUs, which are designed to support AI workloads.Google Cloud's order backlog reached $561 billion, reflecting significant demand for computing capacity and related services.Sundar Pichai, CEO of Google and Alphabet, said the company had reached an annualised revenue run rate exceeding $500 billion, supported by growth across its businesses.

He also said Google's Gemini AI application had crossed one billion users, making it the fastest-growing product in the company's history.(You can now subscribe to our ETMarkets WhatsApp channel)