Alphabet shares fell 8.5% on Wednesday after the Google parent reported third-quarter earnings below Wall Street expectations, as investment losses and rising costs offset strong revenue growth and accelerating demand for artificial intelligence (AI) services.
The company reported earnings per share of $2.12, missing the analyst consensus of $3.02 by $0.90. Revenue, however, rose 25% to $127.6 billion, slightly exceeding the $127.22 billion expected by analysts.
The earnings shortfall was driven partly by a sharp reversal in non-operating income. Alphabet recorded an $8.2 billion net expense, compared with $12.8 billion in net other income a year earlier.
The company also reported an $8.7 billion loss on equity securities, which reduced net income by $6.7 billion, equivalent to $0.55 per diluted share, after tax.
Despite the weaker earnings, Alphabet’s operating performance remained strong, with operating income increasing 30% to $40.6 billion. However, research and development expenses rose to $20.6 billion from $15.2 billion a year earlier.
The company’s earnings release did not specify how much each factor contributed to the $0.90-per-share shortfall against analysts’ expectations.
AI and cloud businesses record strong growth
Chief Executive Officer Sundar Pichai said Alphabet had reached a half-trillion-dollar annual revenue run rate, citing growing adoption of AI across its businesses.
Google Cloud recorded a 103% increase in revenue to $30.7 billion, while operating income more than tripled to $11.1 billion.
Google Cloud Chief Executive Officer Thomas Kurian said customers of Gemini Enterprise had more than quadrupled their spending year on year. He added that more than 90% of Fortune 100 companies used the platform.
Kurian also disclosed that the division now had 18 product lines generating more than $1 billion in annual sales.
Pichai highlighted progress in the company’s AI models, saying its new Carbon model outperformed Gemini 4 Argon and was being tested with the US government. An initial rollout is planned for cybersecurity partners.
He also said Google search queries were growing at their fastest rate in five years.
AI infrastructure spending weighs on cash flow
Alphabet’s accelerating AI expansion has come with a substantial increase in infrastructure spending.
Capital expenditure reached $51.4 billion in the third quarter, more than doubling from $24 billion in the same period a year earlier. Year-to-date capital expenditure totalled $132 billion.
The company maintained its full-year capital expenditure forecast of between $195 billion and $205 billion, broadly in line with the analyst consensus of $202.21 billion.
Free cash flow turned negative at $9.1 billion, with infrastructure spending, tensor processing unit (TPU) inventory and an EU fine contributing to the outflow.
Alphabet also disclosed $924 billion in future purchase commitments, highlighting the scale of its financial obligations as it expands infrastructure to meet growing AI demand.
The combination of higher spending and substantial future commitments has increased scrutiny of how effectively the company can convert its AI investments into earnings and cash flow.
Investors weigh growth against rising costs
Alphabet’s latest results present a contrast between accelerating demand for its cloud and AI services and mounting pressure on profitability and cash generation.
While revenue and operating income increased, investment losses, higher research and development expenses and rising infrastructure costs weighed on the company’s financial performance.
The 8.5% decline in its shares reflected investor concerns over the earnings miss despite strong business growth.
The results leave investors weighing the potential of Alphabet’s expanding AI and cloud businesses against the costs of scaling infrastructure, its substantial future purchase commitments and volatility in investment returns.
