Alphabet, Google's parent company, shed more than $500bn (£374bn) in market value on Thursday following disappointing quarterly results that exposed the tension between massive artificial intelligence spending and the health of its core search business. According to BBC News, the company's stock fell sharply after revealing that AI-powered search summaries are reducing the number of advertisements it can display to users.
The sell-off reflected broader investor anxiety about whether technology giants can sustain their enormous AI infrastructure investments while maintaining profitability. Microsoft and Amazon also reported earnings this week and signalled continued heavy spending on artificial intelligence, but all three companies faced market scepticism about the financial returns these outlays will generate.
How did Alphabet's financial performance compare to expectations?
Alphabet's headline numbers initially appeared solid. Total revenue climbed 25% year-on-year to $127.6bn, driven partly by Google Cloud, which nearly doubled its revenue to almost $31bn. However, the company's net profit contracted by 25% during the quarter, and it recorded negative free cash flow exceeding $9bn—nearly double the $5.9bn loss reported three months earlier, according to CNBC.
Search and other revenue rose 12% to approximately $63bn, missing analyst estimates for a second consecutive quarter. The slowdown marks a sharp deceleration from earlier in the year: search revenue growth had already fallen from 19% in the first quarter to 17% in the second quarter before reaching 12% in the third quarter.
By the close of trading on Thursday, Alphabet's total stock market capitalisation had fallen to $3.46 trillion from $3.97 trillion the previous day. According to StockTitan's count, the 12.6% one-day decline represented the company's largest drop since its 2004 listing.
Why is Google's AI search hurting its advertising business?
Google's search engine now defaults to displaying AI-generated summaries of user queries, and this shift is directly damaging ad sales. The company's search results page traditionally generated revenue by displaying advertisements alongside organic results, and this remains the vast majority of Alphabet's total business.
According to Yahoo Finance, Philipp Schindler, Google's chief business officer, acknowledged that AI Mode queries have lower monetization rates than traditional search. He also noted that AI Mode queries are three times longer on average and that one in five globally used voice, images, or documents in their searches.
Despite these headwinds, search query growth reached its strongest level in five years, suggesting that user engagement remains robust even as revenue per query declines. The company reported 1 billion Gemini app users and nearly 32 billion tokens processed per minute by its first-party model APIs, up 40% from the prior quarter.
What is driving Alphabet's massive cash burn?
The company's negative free cash flow—representing money spent beyond what operations and investments generate—is almost entirely attributable to AI infrastructure spending. Alphabet is investing heavily in data centres, computing power, and model development to compete in the rapidly evolving artificial intelligence market.
Tracy Woo, a principal analyst at Forrester, characterised the challenge facing Alphabet: the company must fund enormous AI investments while simultaneously maintaining the strength of its established search business. This tension has become increasingly visible as the company's core revenue engine slows.
CEO Sundar Pichai has publicly backed the company's substantial AI spending, arguing that these investments are necessary for long-term competitiveness. However, investors have grown impatient with the lack of clear financial returns from these outlays, particularly as profitability declines.
How does this compare to other technology giants?
Microsoft and Amazon both reported earnings this week and announced plans to continue spending at elevated levels on AI infrastructure. However, both companies faced similar investor concerns about the sustainability and profitability of these spending programmes.
Microsoft's approach has differed somewhat: the company reported quarterly profits of $36.6bn while simultaneously announcing voluntary buyouts for 60,000 workers, reflecting a strategy to fund massive AI infrastructure investments through workforce reductions and cost-cutting measures.
The pattern across Big Tech suggests that investors want clearer evidence of returns from AI spending. While companies are processing record amounts of data and building increasingly sophisticated models, the path to monetization remains uncertain, and investors are questioning whether current spending levels can be justified by future revenue growth.
What happens next?
Alphabet's next earnings report is forecast for 3 February 2027, when the company will provide further insight into whether the slowdown in search revenue stabilises or accelerates. The market will be watching closely for any indication that AI investments are beginning to generate offsetting revenue gains or whether the drag on profitability will persist.
