Alphabet shares tumble 10% as search unit slowdown overshadows cloud boom

Alphabet (NASDAQ: GOOG) shares fell by more than 10% in premarket trading on Wednesday, after the Google-parent reported third-quarter earnings below Wall Street expectations, as sluggish advertising revenue from its web-search unit overshadowed accelerating demand for artificial intelligence-enhanced services.

Google’s typically mighty ad revenue grew at its slowest pace in five quarters, exacerbating fears around the possible returns the company will eventually reap from its massive AI spending plans. In a call with investors, Google management said that while users were embracing its "AI Mode" search option, these queries have been monetized at a slower rate than traditional searches.

Group-wide earnings per share stood at $2.12, missing Wall Street consensus estimates of $3.02 by $0.90. Revenue rose 25% to $127.6 billion, compared to expectations of $127.22 billion.

CEO Sundar Pichai said Alphabet was now at a half-trillion-dollar annual revenue run rate, as AI adoption gains momentum across its businesses. Customers of Gemini Enterprise more than quadrupled their spending year over year, while more than 90% of Fortune 100 companies use the platform, Google Cloud CEO Thomas Kurian said on the earnings call.

Google Cloud revenue surged 103% to $30.7 billion, while operating income more than tripled to $11.1 billion. The division now has 18 product lines generating more than $1 billion in annual sales, Kurian said.

Pichai also highlighted progress in Google’s AI models. The company’s new Carbon model outperforms Gemini 4 Argon and is being tested with the U.S. government, with an initial rollout planned for cybersecurity partners. Meanwhile, search queries are growing at their fastest rate in five years, he said.

Yet Alphabet’s AI expansion is putting increasing pressure on cash generation. Capital expenditures reached $51.4 billion in the quarter, up from $24 billion a year earlier, bringing year-to-date spending to $132 billion. The company maintained its full-year capital expenditure forecast of $195 billion to $205 billion, broadly in line with the $202.21 billion analyst consensus.

Free cash flow subsequently fell deeper into negative territory, with spending on infrastructure, TPU inventory and an EU fine contributing to the cash outflow. Alphabet also disclosed $924 billion in future purchase commitments, underlining the scale of its obligations as it expands infrastructure to meet AI demand.

"[T]he results raised questions about whether the payoffs will come fast enough to justify the company’s soaring capex spend," analysts at Deutsche Bank said in a note.

(Scott Kanowsky contributed reporting)