Alphabet AI Spending Surge Rattles Investors After Earnings Miss

Alphabet’s shares fell 12.6% on Thursday, 29 October, after the Google parent reported third-quarter revenue that rose strongly but missed analyst expectations, while its spending on AI infrastructure surged.

The company reported revenue of $127.577 billion for the three months to 30 September, up 25% year on year. That was below the $127.97 billion FactSet consensus cited by AP and the $128.2 billion LSEG estimate reported by Reuters.

Net income available to common shareholders fell to $26.17 billion from $34.98 billion a year earlier. Diluted earnings per share came in at $2.12, compared with $2.87 in the same quarter of 2025, after an $8.7 billion loss on equity investments reduced earnings by roughly 55 cents per share.

AI build-out hits cash flow

Alphabet spent $51.4 billion on capital expenditure during the quarter, with the vast majority directed at technical infrastructure for AI. Around 65% of that technical-infrastructure investment went on servers and networking equipment, with the rest going on data centres.

Operating cash flow was $42.3 billion, but free cash flow was negative $9.1 billion. Alphabet attributed the result to capital expenditure, inventory accumulation for TPU-system sales and a $5.2 billion cash payment linked to a 2018 European Commission fine.

It was the company’s second consecutive quarter of negative free cash flow, according to Reuters. Alphabet kept its 2026 capital-expenditure guidance at $195 billion to $205 billion, while chief financial officer Anat Ashkenazi said spending would “increase significantly” in 2027.

Cloud growth was the bright spot

Google Cloud revenue more than doubled to $30.709 billion, up 103% year on year, helped by demand for cloud infrastructure, enterprise AI services and TPU systems. Operating income rose to $11.121 billion, lifting the division’s operating margin to 36.2%.

Google Cloud’s backlog reached $561 billion, with Alphabet expecting to recognise just over 55% of it as revenue over the following 24 months. The company also said sales of TPU Systems, which combine its chips with related hardware and software, made a meaningful contribution to cloud growth.

However, Alphabet warned that building inventory for those systems would add further pressure to free cash flow. It is also using third-party computing capacity to meet cloud demand, creating near-term margin pressure.

Search advertising misses expectations

Google Services revenue rose 11% to $96.302 billion, while Search and other revenue increased 12% to $63.350 billion. Total advertising revenue reached $82.012 billion, but Reuters reported this was about $1.4 billion below expectations.

Chief business officer Philipp Schindler said some slower search-advertising growth reflected the increasing use of AI Mode, where advertising is less developed than in traditional search. Google plans to begin rolling out AI Mode ads to international markets, although a UK launch date was not confirmed.

“Our ad experiments have shown promising results, and we’re now scaling ads within both AI Overviews and AI Mode to more users and more queries, including, as I mentioned, international markets and multiturn ads in the U.S.”

Alphabet also highlighted Gemini 4 Argon and Gemini 4 Carbon, saying its first-party model APIs were processing nearly 32 billion tokens per minute, more than four times the level a year earlier. It said the Gemini app had reached one billion users, but did not confirm UK consumer pricing, availability or release dates for the new models.