MYTE

By Christine Ji

A doubling of cloud revenue wasn't enough to appease Wall Street as investors grow more concerned that AI is hurting the company's ability to make money off search queries

Alphabet's $51.4 billion AI spending spree led to negative free cash flow of $9.1 billion.

Shares of Alphabet were falling hard in after-hours trading as the company reported a third-quarter revenue and earnings miss on Wednesday, stoking fears that artificial intelligence is pressuring its core search-engine business.

Overall revenue for Alphabet (GOOGL) (GOOG) grew 25% from a year before to $127.6 billion, missing the $128.0 billion figure expected by analysts. Earnings per share of $2.12 were also lower than Wall Street consensus estimates of $3.02, driven by a $8.6 billion paper loss on equity stakes which the company attributed to its investment in SpaceX (SPCX).

Google Cloud stood out as a bright spot, growing 103% from the same period a year earlier to reach $30.71 billion in revenue and blowing past the $28.8 billion expected by Wall Street analysts. But beyond that, Alphabet fell short in key areas like advertising and search, even as growth in the number of queries reached the highest level in five years.

The results suggest that Google is struggling to monetize its artificial-intelligence investments, Ryan Lee, senior vice president of product and strategy at Direxion, wrote in a Wednesday note. Lee called the results a "bad combination," adding that "the continued cash burn gets harder to justify without monetization or the core business growing to compensate for it."

The company spent $51.4 billion on AI infrastructure last quarter, leading to negative free cash flow of $9.1 billion as the amount of money put toward equipment and data centers outstripped the amount of cash generated by Alphabet's business.

Alphabet's stock was down 9.4% in after-hours action on Wednesday. That would amount to its worst one-day drop since a 9.5% decline in October 2023 if the loss holds through Thursday's regular session.

The results likely revived fears that AI competitors like OpenAI's ChatGPT or Meta's (META) Muse agent are chipping away at Google's search business, BNP Paribas analyst Nick Jones wrote in a Wednesday note. Investors are concerned that agentic shopping experiences will deal a blow to Google's advertising revenue if AI agents do most of the web browsing.

According to a Wednesday note from Bernstein analyst Mark Shmulik, the initial read on Alphabet's quarter offered far more negatives than positives. Search growth of 12% relative to a year before is a "material deceleration" from the 17% growth in the second quarter, Shmulik wrote. That's led investors to wonder why growth in the number of queries isn't helping search revenue to the degree it did in previous quarters.

Search revenue was impacted by currency fluctuations this quarter, the company said on the earnings call. And while queries in AI Mode are on average three times longer than traditional searches, they also come with lower monetization for the time being, Alphabet said.

Even Google Cloud's beat seemed lackluster, as Shmulik said that institutional investors had been targeting over 115% growth going into earnings.

-Christine Ji

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