The core operations of America's largest technology companies — the advertising, consumer and retail engines that fund a combined $750 billion in AI spending this year — are beginning to lose momentum. In certain instances, these very businesses are being eroded by the same technology the companies are staking their futures on.
Earlier this week, Google parent Alphabet Inc. disclosed that ad revenue from search and other channels — a segment representing roughly half of total revenue — expanded at its weakest rate in five quarters. Nevertheless, the company upheld a capital expenditure forecast of up to $205 billion for the year.
Amazon.com Inc. announced Thursday that growth in both its core e-commerce operation and its advertising division decelerated last quarter, before reaffirming plans for approximately $220 billion in capital expenditures this year. Microsoft Corp. and Meta Platforms Inc. likewise maintained their spending guidance, while delivering results that ultimately disappointed investors.
The earnings reports and the subsequent stock selloffs reveal the mounting tensions surrounding big tech's shift toward new AI-powered products and the costs required to achieve that transition. These companies have been issuing unprecedented levels of debt, selling equity, signing multibillion-dollar data center agreements and assuming trillions of dollars in future obligations to finance a global build-out of AI infrastructure. All of this is happening while new products erode profitability and divert attention from some of their legacy offerings.
Investor patience is running thin. Alphabet's shares suffered a record plunge on Thursday, erasing nearly $500 billion in market value. Amazon's stock dropped 7% in late trading. Meta has declined 10% since reporting earnings last week, when it informed investors that it intends to bet even more aggressively on AI while cautioning that its new agentic AI app Muse is proving to be extraordinarily computing intensive.
The market is "scratching its head — how does all this pay off?" said Dan Morgan, senior portfolio manager at Synovus Trust, following Alphabet's earnings.
Even Microsoft, which reported robust growth in its cloud business and kept spending under control, could not escape the fallout. The company's shares initially climbed after it reported that sales at Azure, its closely watched cloud computing division, grew 48% to $33.2 billion during the quarter ending in September. By the time markets closed on Thursday, the stock had surrendered all gains and was down 0.2%.
Amazon's results were more complex. The company had moved its annual Prime Day from the third quarter last year to the second quarter this year, which accounted for some of the slowdown. But analysts had already adjusted their estimates with that in mind, and results still fell short.
The commerce giant's advertising services unit recorded growth of 11%, the slowest pace since Amazon first reported it as a separate category in 2022. And the online stores business grew by just 2%, a level not seen in more than three years when people reverted to pre-pandemic spending habits and online shopping cooled.
Those results overshadowed the growth of Amazon's cloud-computing segment and intensified investors' doubts about its aggressive investments in AI.
Cloud computing was also a bright spot for Google. The cloud division's sales more than doubled from a year earlier. Operating income more than tripled. The unit's chief executive officer, Thomas Kurian, joined the earnings call for the first time, signaling the business's importance to Google going forward.
But investors were more fixated on the cracks emerging within Google Search, which remains the lifeblood of the company. To stay relevant as chatbots such as ChatGPT become more popular, Google has woven more AI into the search engine, including a dedicated tab called AI Mode. But the growing popularity of that feature has hurt the profitability of Google Search.
Chief Business Officer Philipp Schindler acknowledged on Wednesday that the firm is seeing "lower monetization" for queries with AI Mode, an admission that sent its stock falling further. Schindler said the company is working to bring more ads to AI Mode and is optimistic about the product's trajectory.
Google has struggled this year to keep pace in the AI race against startups Anthropic and OpenAI. If the company can regain its footing on AI model development, it will likely resume delivering the returns that investors have come to expect, said Mandeep Singh, an analyst with Bloomberg Intelligence.
"With all these transitions, sometimes we get too fixated on the cash cow business," Singh said. "Given how Cloud has been expanding margins, I feel a combination of the cloud business and search, once they are at the frontier, would take their profitability back to where they were."
It's also common for new ad formats to launch with lower margins that gradually increase over time, Gene Munster, managing partner of Deepwater Asset Management, said of Google's lower AI Mode monetization. The firm's larger challenge is building agents that can make purchases on behalf of users and pocketing a cut of those transactions — a business model that many in Silicon Valley believe is within reach after the success of Meta's Muse personal assistant.
"The old way of doing it was blue links or display advertising to influence consumer behavior," Munster said. "The new way is how do you influence the bot."
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