Alphabet burns $9.1 billion in cash as AI spending outpaces search ad revenue

Alphabet lost $9.1 billion in cash during the third quarter, a sharp reversal for a company known for generating steady profits. The deficit resulted from aggressive spending on artificial intelligence infrastructure that far outpaced revenue from its core search advertising business. Investors reacted to the news by sending shares down 10 percent after trading hours.

The company reported total revenue of $127.6 billion for the quarter ended September 30. This figure fell short of the $128.2 billion analysts projected. Advertising revenue specifically came in at $82 billion, missing estimates of $83.4 billion by $1.4 billion. In contrast, Google Cloud revenue more than doubled to $30.71 billion, exceeding market expectations.

Chief Financial Officer Anat Ashkenazi explained the cash flow position on a conference call with analysts. She stated that the company is currently building out cloud capacity and funding AI development. This strategy led to a $5.9 billion cash burn in the quarter. This marks the first time Alphabet has reported negative free cash flow in 22 years as a public company.

Philipp Schindler, Chief Business Officer, attributed the slowdown in search ad growth to the increased use of AI Mode. This new chatbot interface is still being tested for advertising potential. Schindler said Google will begin rolling out ads in AI Mode to international markets. The shift aims to integrate advertising into the conversational search experience.

Thomas Kurian, CEO of Google Cloud, joined the earnings call for the first time. He noted that sales of tensor processing units have become a meaningful contributor to the business unit. These chips compete directly with graphics processing units from Nvidia. Alphabet began recognizing revenue from direct sales of these TPU systems in the previous quarter.

Kurian said the backlog for Google Cloud has grown to $561 billion. The company expects to recognize more than 55 percent of this amount as revenue within the next 24 months. The backlog includes multi-year infrastructure deals with clients in cybersecurity, retail, and financial services. Google Cloud ranks as the third-largest cloud provider globally behind Amazon Web Services and Microsoft Azure.

Ashkenazi warned that near-term margins would face pressure from the use of third-party cloud capacity. She also noted that expanding TPU inventory would further strain free cash flow. The company plans to increase capital expenditures for 2027 significantly compared to this year's forecast of $195 billion to $205 billion. Executives did not provide a specific number for next year's spending.

Dave Wagner, portfolio manager at Aptus Capital Advisors, said investors need to see search accelerating to justify the current valuation. He noted that cloud growth is strong but the market is worried about AI impacting the core franchise. Jeremy Saltsburg of Check Capital cautioned that a capex figure of $300 billion could scare the market given the current negative cash flow.

Net income available to common shareholders fell 25 percent to $26.17 billion. Adjusted earnings per share of $2.67 missed the target of $3.02 set by Wall Street analysts. Earlier in the day, CEO Sundar Pichai announced the Gemini 4 Carbon model to demonstrate the company's position in the AI race. Analysts at Bernstein questioned whether the new model deployment was rushed to offset the weaker financial results.

Rival Microsoft also reported results on Wednesday and saw shares rise more than 5 percent. Microsoft benefited from positive free cash flow that beat estimates. The divergent stock reactions highlight the market's focus on the balance between massive AI investments and immediate profitability. Alphabet's strategy relies on long-term infrastructure growth to support its future revenue streams.