Investors Dump Alphabet Stock After Profit Miss, Ad Slowdown and Eye-Watering AI Spending Spree

Shares in Alphabet, Google's parent company, plunged more than 10 per cent in after-hours trading in New York on Wednesday after the company reported weaker-than-expected profit, slower advertising growth and a sharp rise in spending on artificial intelligence (AI) infrastructure.

Revenue rose 25 per cent year on year to $127.58 billion (£104.6 billion) in the third quarter, slightly short of analysts' expectations. Net income fell 25 per cent to $26.17 billion (£21.4 billion), or $2.12 (£1.74) a share on a diluted basis.

Results were affected by an $8.7 billion (£7.1 billion) loss on equity investments. This included an unrealised loss linked to Alphabet's investment in Elon Musk's SpaceX, according to reporting on the earnings call. An unrealised loss reflects a change in an investment's value and does not mean the stake was sold.

Cloud Growth Races Ahead as Ads Cool

Google Cloud was the standout performer. Revenue rose 103 per cent to $30.7 billion (£25.1 billion), while operating income more than tripled to $11.1 billion (£9.1 billion). Alphabet attributed the growth to demand for AI infrastructure and solutions, core cloud services and sales of its in-house tensor processing unit (TPU) chips.

Advertising grew more slowly. Google advertising revenue rose 11 per cent to $82 billion (£67.0 billion), with Google Search and other revenue up 12 per cent to $63.35 billion (£51.8 billion).

YouTube advertising revenue increased 9 per cent to $11.2 billion (£9.2 billion), down from 13 per cent growth in the previous quarter. Chief executive Sundar Pichai described YouTube as the leading streaming platform in the US by watch time.

Alphabet said YouTube Music and YouTube Premium had more than 150 million subscribers globally, including users on free trials.

Cash Squeezed by AI Spending Drive

Capital expenditure reached $51.4 billion (£42.0 billion), more than double the roughly $24 billion (£19.6 billion) spent a year earlier. Alphabet expects capital expenditure of $195 billion to $205 billion (£159.2 billion to £167.4 billion) in 2026 and said spending would increase significantly in 2027.

The company reported negative free cash flow of $9.1 billion (£7.4 billion), compared with positive free cash flow of $24.6 billion (£20.1 billion) a year earlier. It was the second consecutive quarter of negative free cash flow.

The figure reflected $51.4 billion (£42.0 billion) in capital expenditure against $42.3 billion (£34.6 billion) in operating cash flow. Operating cash flow was also affected by a $5.2 billion (£4.2 billion) payment relating to a 2018 European Commission fine and higher inventory investment to support TPU sales.

Alphabet raised $28.7 billion (£23.4 billion) through senior unsecured notes during the quarter, with the proceeds designated for general corporate purposes.

It also received $12.4 billion (£10.1 billion) in net proceeds from issuing Class A and Class C shares under an at-the-market programme. The company ended the quarter with $265.1 billion (£216.6 billion) in cash and marketable securities.

Investors are weighing that spending against Alphabet's growth prospects and its ability to generate returns on its AI investment.

Gemini User Surge and Waymo Expansion

Alphabet said the Gemini app had reached one billion users. Separately, its first-party AI model APIs were processing nearly 32 billion tokens a minute, more than four times the level a year earlier.

The company said it launched Gemini 4 Argon two weeks ago and announced Gemini 4 Carbon on Wednesday. Alphabet said Carbon has advanced cybersecurity capabilities and will initially be made available to a subset of trusted cyber defenders.

Alphabet said its Waymo robotaxi service had expanded to 15 US cities. The company said in June that it was providing more than 500,000 fully autonomous rides a week and is aiming to exceed one million paid weekly trips by the end of 2026.

Alphabet's Other Bets division reported revenue of $372 million (£305 million) and an operating loss of about $2 billion (£1.6 billion).