Why Google shares plunged over 10%

This was worse than the negative $5.9 billion reported in the previous quarter. The cash outflow was much higher than Wall Street had expected. It was only the second time since Google went public in 2004 that the company reported negative free cash flow for a quarter. Google shares fell more than 10% in after-hours trading, the Financial Times reported. If the decline continues during regular trading, it could wipe out more than $400 billion from Alphabet's market value, marking the biggest single-day loss in the company's history.

The company's capital expenditure, or spending on long-term assets such as data centres and computing equipment, rose to $51.3 billion in the third quarter. This was up from $44.9 billion in the previous quarter. Chief financial officer Anat Ashkenazi repeated that Alphabet's capital expenditure could reach as much as $205 billion this year. This means the company could spend up to $73.1 billion in the fourth quarter alone.

Alphabet has also disclosed more than $1 trillion in future commitments covering data centre purchases, leases, equipment, energy and other expenses. To fund its growing spending needs, the company has taken on tens of billions of dollars in debt. In June, it also announced plans to raise about $85 billion through its first share sale in more than two decades. This marks a major change for Alphabet, which had spent years buying back its own shares.

Alphabet's revenue rises, but profit falls short Alphabet's overall revenue increased 25% year-on-year to $127.6 billion in the third quarter. However, the figure was slightly below the average analyst forecast compiled by FactSet. Net income fell 25% to $26.2 billion compared with the same period a year earlier. This was well below analysts' expectations of $37.3 billion. The fall in net income was partly linked to changes in the value of Alphabet's investments, which include a stake in Elon Musk's SpaceX.

SpaceX's value fell by about 4% during the period, contributing to Alphabet reporting an $8.7 billion net loss on equity investments. Operating income, which does not include these investment losses, rose 30% to $40.6 billion. However, this was still below Wall Street's forecast of $43.2 billion. Revenue from Google Cloud doubled to $30.7 billion, supported by growing demand for the company's AI services.

The division also earns money by selling computing capacity to other companies, including AI start-up Anthropic. Google has presented its “full-stack” AI strategy as a major advantage over competitors. The company develops its own chips, builds data centres and creates advanced AI models. It then offers these technologies to billions of users through its existing apps and services. This approach allows Google to control several parts of the AI business, from the infrastructure needed to run models to the services customers use.

However, chief executive Sundar Pichai has faced criticism for moving too slowly in the AI race. Critics have questioned how a company of Google's size allowed start-ups such as Anthropic and OpenAI to gain ground in the enterprise market, where businesses pay for AI products and services. Pichai said Google had made progress with two new versions of its most advanced Gemini AI models, named Argon and Carbon.

According to Pichai, the new models have narrowed the gap with competitors in areas such as coding, finance and cyber security. He said they should help Alphabet regain market share in these businesses. Microsoft gets a better response from investors Microsoft received a much warmer response from investors on Wednesday, with its shares rising 4% after strong growth in its Azure cloud business helped the company report revenue and profit above market expectations.

Microsoft's capital expenditure also increased, reaching $45.2 billion. However, the company still generated $18.6 billion in free cash flow, unlike Google, which reported a large cash outflow. The difference between the two companies has become an important concern for investors as major technology groups pour billions of dollars into AI infrastructure. Google's search advertising business raises concerns Alongside its rising AI costs, Google is also facing questions about the performance of its traditional search business.

Revenue from its largest division, which includes its search advertising business, increased 12% year-on-year to $63.4 billion in the third quarter. However, this was below analysts' expectations of $64.9 billion. The growth rate was also slower than the nearly 20% annual increase recorded earlier in the year. Google has acknowledged that its AI-powered search feature, called “AI mode”, is affecting the traditional search business.

The feature gives users conversational answers in text rather than simply presenting a list of links to websites. Addressing investors and analysts during Alphabet's quarterly earnings conference, Philipp Schindler, Google's chief business officer, said searches made through AI mode were taking business away from traditional search and leading to “lower monetisation” through advertising David Wagner, head of equity at Aptus Capital Advisors, said the slowdown was worrying investors because of the threat posed by AI chatbots to Google's main business.

“Search is where the concern sits,” Wagner said, according to the Financial Times. “In a market worried about AI chatbots cannibalising its key franchise, investors need to see it accelerating, not decelerating.”