Alphabet (NASDAQ:GOOG) shares declined more than 10% in premarket trading on Wednesday after the Google parent company reported third-quarter earnings below analysts’ expectations, as slower advertising growth in its search business drew attention away from increased revenue in its cloud computing division.
The company reported earnings per share of $2.12, compared with Wall Street’s consensus estimate of $3.02. Revenue increased 25% to $127.6 billion, slightly exceeding expectations of $127.22 billion.
Google Cloud revenue rose 103% to $30.7 billion, while operating income more than tripled to $11.1 billion. However, investors were also assessing the financial implications of Alphabet’s substantial spending on artificial intelligence infrastructure.
Alphabet’s premarket decline followed quarterly results that showed differences between the performance of its search advertising operations and its cloud computing business.
Earnings per share of $2.12 were $0.90 below the consensus forecast of $3.02, despite total revenue exceeding analysts’ expectations.
Google’s advertising revenue recorded its slowest growth rate in five quarters, drawing attention to the company’s ability to generate revenue from artificial intelligence features introduced into its search products.
At the same time, Alphabet reported increased capital expenditure and negative free cash flow associated with its infrastructure expansion.
These developments were among the factors investors evaluated following the earnings announcement.
Alphabet reported consolidated third-quarter revenue of $127.6 billion, representing an increase of 25% from the previous year.
The figure was slightly above analysts’ consensus estimate of $127.22 billion.
However, earnings per share reached $2.12, below the $3.02 expected by Wall Street.
The difference of $0.90 per share reflected an earnings result that fell short of market forecasts despite the company’s reported revenue growth.
Chief Executive Officer Sundar Pichai said Alphabet had reached an annualised revenue run rate of approximately $500 billion.
The figure represented the company’s revenue at its current annualised pace rather than revenue already recorded over a completed 12-month period.
Google’s advertising revenue grew at its slowest pace in five quarters during the reporting period.
The performance attracted attention because search advertising remains an important component of Alphabet’s business.
During the earnings conference call, management discussed the adoption of AI Mode, Google’s artificial intelligence-based search option.
Executives indicated that users were increasingly adopting the feature, although searches conducted through AI Mode were generating revenue at a slower rate than traditional search queries.
The difference in monetisation rates raised questions about how changes in search behaviour could affect advertising revenue as the company expands its AI services.
Pichai also said overall search query growth had reached its fastest rate in five years.
The figures indicated increased search activity alongside differences in the revenue generated by traditional and AI-assisted searches.
Google Cloud reported third-quarter revenue of $30.7 billion, an increase of 103% compared with the previous year.
Operating income for the division more than tripled to $11.1 billion.
The figures reflected growth in Alphabet’s cloud computing operations, including services supporting artificial intelligence workloads.
Google Cloud Chief Executive Officer Thomas Kurian said the division now had 18 product lines generating more than $1 billion each in annual sales.
The performance demonstrated the scale of revenue generated by Google’s cloud products, although the division’s growth occurred alongside substantial group-wide infrastructure investment.
Alphabet provided additional information about customer adoption of its artificial intelligence products during the earnings conference call.
Kurian said spending by Gemini Enterprise customers had increased more than fourfold compared with the previous year.
He also reported that more than 90% of Fortune 100 companies were using the platform.
The figures provided information about the adoption of Alphabet’s enterprise AI services among large corporate customers.
Pichai said increased use of artificial intelligence products was contributing to activity across the company’s businesses.
However, adoption figures do not independently establish the profitability or future financial returns associated with the company’s AI investments.
Pichai also discussed developments in Alphabet’s artificial intelligence models.
According to the company, its new Carbon model outperforms Gemini 4 Argon.
The model was undergoing testing with the US government, with an initial rollout planned for cybersecurity partners.
The announcement formed part of Alphabet’s broader update on AI product development and deployment.
The company did not provide specific revenue or profitability figures associated with Carbon in the supplied earnings information.
Alphabet reported third-quarter capital expenditure of $51.4 billion, compared with $24 billion in the corresponding period a year earlier.
The increase amounted to $27.4 billion.
Capital expenditure for the first nine months of the year reached $132 billion.
The company maintained its full-year capital expenditure forecast of $195 billion to $205 billion, broadly consistent with analysts’ consensus estimate of $202.21 billion.
The spending reflects Alphabet’s investment in computing infrastructure and other assets supporting artificial intelligence and cloud services.
The scale of the expenditure has become an important consideration in assessments of the company’s cash generation and future returns.
Alphabet’s free cash flow moved further into negative territory during the quarter.
The company identified infrastructure spending, purchases of tensor processing unit (TPU) inventory and a European Union fine among the factors contributing to the cash outflow.
Capital expenditure of $51.4 billion represented a substantial use of cash during the reporting period.
Alphabet also disclosed $924 billion in future purchase commitments.
These commitments provided additional information about the scale of the company’s planned obligations as it expands infrastructure capacity.
The combination of capital spending, inventory requirements and other payments contributed to the difference between Alphabet’s revenue growth and its cash flow performance.
Analysts at Deutsche Bank commented on the relationship between Alphabet’s increasing investment expenditure and the financial returns expected from artificial intelligence.
In a research note, the analysts stated:
“[T]he results raised questions about whether the payoffs will come fast enough to justify the company’s soaring capex spend.”
The comments focused on the timing of potential returns relative to the company’s capital expenditure programme.
Alphabet’s reported cloud revenue growth and AI product adoption figures provided information about commercial demand, while the spending and cash flow figures illustrated the financial requirements associated with expanding its infrastructure.
Investors may continue to monitor the growth rate of Google’s search advertising revenue and the monetisation of AI Mode as the company expands its artificial intelligence search features.
Google Cloud revenue, operating income and Gemini Enterprise adoption will provide additional information about demand for the company’s cloud and AI services.
Capital expenditure, free cash flow and the timing of future purchase commitments are also relevant to assessments of Alphabet’s financial performance.
The company’s full-year capital expenditure forecast of $195 billion to $205 billion remains a significant component of its investment plans.
The latest results presented increased cloud revenue and enterprise AI adoption alongside slower advertising growth, earnings below expectations and substantial infrastructure spending.
Alphabet is the parent company of Google and operates businesses covering internet search, digital advertising, cloud computing, artificial intelligence and other technology services.
Its principal operations include Google Search, YouTube, Google Cloud and AI products such as Gemini.
The company’s financial performance is influenced by advertising demand, cloud services revenue, operating costs and investment in computing infrastructure.
Alphabet stock price
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