Alphabet stock drops after profit and sales fall

Alphabet reported third-quarter sales and profit that fell short of expectations, in a sign that the company is failing to generate enough return to justify its massive spending in AI. The stock fell in late trading.

Google’s parent company said sales, excluding partner payouts, were $111.2 billion for the three months that ended on September 30 – just below the $111.3 billion that analysts had projected on average. Alphabet reported net income of $2.12 a share, falling far below Wall Street’s estimate of $2.99.

Google’s race to build AI infrastructure for itself and its customers has sent its expenditure to record levels, and the company is facing increasing pressure from investors to prove that all the spending is paying off.

It is working to develop AI models and integrate them into consumer products such as the search engine, YouTube and Gmail, but it has yet to justify the levels of spending and sales from the search division also disappointed.

The company’s shares were down more than 10 per cent in after-hours trading.

Alphabet’s equity investments weighed on net income in the third quarter, generating an $8.7 billion loss. That is a sharp reversal from its gains a year earlier and the windfall in the second quarter, driven largely by its stakes in SpaceX and a private company that Bloomberg later identified as Anthropic.

Google’s cloud unit, a key gauge of demand for the company’s AI products and hosting services, reported sales of $30.7 billion and profit of $11.1 billion, above analyst estimates of $29.1 billion and $9.8 billion respectively.

The company depends on the strength of its advertising and search business to fund AI investments — even as those products evolve to account for AI-generated answers in search. Google said it generated $63.4 billion in revenue from search and related businesses during the quarter, below the average estimate of $64.9 billion.

The company posted negative free cash flow for a second consecutive time, falling $9.1 billion in the red in the third quarter.

Alphabet said in July that capital expenditures will reach as much as $205 billion this year, more than double what it spent last year. AI requires massive amounts of computing power, and Google is racing to build data centres so it can meet demand for AI from users, businesses and its own employees.

Over the past few years, Google has been attempting to reinvent its search engine for the AI age, trying to keep users in the habit of relying on its answers even as chatbots from OpenAI and Anthropic become more popular.

The company now delivers AI-generated answers in response to many searches, a shift that has had major implications for businesses that have traditionally relied on the search giant for traffic and advertising revenue.

Google has worked to build an edge in the AI race by generating more personalised responses to questions, building on years of information about its users. In recent months, though, the company has fallen behind Anthropic and OpenAI in developing AI coding tools.

Google recently released Gemini 4, which it says excels in areas such as coding and cyber security, although some employees fear the company has yet to fully catch up.