Advertising shortfall outweighs cloud growth
Shares fell 10.4% to $288.35 in extended trading after closing the regular session at $322.22, according to Investing.com. CNBC described the results as Alphabet's first simultaneous miss on revenue and earnings per share in nearly four years.
For the quarter ended September 30, Alphabet generated $127.6 billion in revenue against a $128.2 billion consensus estimate compiled by LSEG. Advertising accounted for the shortfall: Google's core ad business produced $82.01 billion, about $1.41 billion less than analysts had expected, Reuters reported.
Search revenue rose 12% to $63.35 billion but missed the $64.96 billion forecast, according to CNBC. CEO Sundar Pichai nevertheless said the company's AI investments had driven its fastest query growth in five years.
Google Cloud more than doubled its revenue to $30.71 billion, beating estimates but failing to offset the advertising miss. Investing.com's account of Alphabet's earnings presentation put Cloud operating income at $11.1 billion, with its operating margin rising to 36.2% from 23.7%.
Profit falls as investments post losses
Net income available to common shareholders declined 25% to $26.17 billion. On an adjusted basis, earnings were $2.67 a share, below Wall Street's $3.02 target.
Operating income also missed expectations. CNBC reported a total of $40.58 billion, compared with FactSet's $43.19 billion forecast. Even so, Alphabet's operating margin widened by 130 basis points to 31.8%, according to Investing.com.
Equity holdings produced an $8.66 billion loss, reversing a $99.03 billion windfall in the previous quarter, CNBC reported. Investing.com said the third-quarter results included an $8.2 billion unrealized loss on Alphabet's SpaceX investment.
Cash outflow grows ahead of higher capital spending
Alphabet's free cash flow was negative $9.07 billion, far from the near-break-even result analysts had anticipated, according to LSEG data cited by Reuters. The outflow had been $5.9 billion in the preceding quarter, when free cash flow turned negative for the first time in Alphabet's 22 years as a public company.
Spending on additional cloud capacity and AI research drove the cash burn. The company recorded a $7.66 billion operating loss under "Alphabet-level activities," attributing it primarily to AI research and development expenses.
Third-quarter capital expenditures reached $51.36 billion, below analysts' $55.09 billion estimate, CNBC reported. Chief Financial Officer Anat Ashkenazi left the 2026 spending forecast unchanged at $195 billion to $205 billion but said AI-driven capital expenditures would rise significantly in 2027. CNBC reported that annual capex was expected to top $200 billion before exceeding $300 billion in 2027.
Ashkenazi also warned that using third-party cloud capacity would put pressure on margins in the near term. Separately, CNBC reported that long-term debt had reached $125.1 billion, up about 479% from $21.6 billion a year earlier.
The spending reflects the costly AI expansion confronting the sector. Investors are concerned both about companies committing too much money and about the risk of losing ground to rivals if they invest too little, Reuters reported.
Google makes its AI case
Before releasing its results Wednesday, Google announced Gemini 4 Carbon in an effort to counter perceptions that it had fallen behind in AI. Pichai told analysts during the earnings call that the new model put Google back to "leading at the frontier."
Google also said its Gemini app had reached 1 billion users, making it the fastest-growing product in the company's history, according to CNBC.
