Shares of Alphabet Inc. (NASDAQ: GOOGL) fell more than 13% at one point, wiping out over $500 billion in market value, the largest single-day loss in the company's history. The decline followed disappointing revenue from its search and advertising businesses, deepening investor concerns that artificial intelligence (AI) is threatening its core operations.
The Google parent reported third-quarter revenue of $111.2 billion, excluding partner payments, below analyst forecasts. Advertising revenue from search and other channels also missed expectations, growing at its slowest pace in five quarters. That business accounts for roughly half of total revenue and is a key source of funding for the company's massive AI investments.
Analysts including Doug Anmuth of JPMorgan said in research notes that the results and the stock reaction show how little room for error hyperscalers spending hundreds of billions of dollars on AI infrastructure have once their core businesses disappoint.
As of 9:35 a.m. New York time, Alphabet shares were down 13% at $281.37, erasing $511 billion in market value. That stands in sharp contrast to rival Microsoft, whose cloud business grew faster than Wall Street expected while it kept spending in check, driving its shares higher.
Google Chief Business Officer Philipp Schindler said on the earnings call Wednesday evening that the increasingly popular AI Mode tab in Google Search is weighing on the company's results. He said AI queries "monetize at a lower rate," though the company remains optimistic and plans to place more ads in that part of the search engine.
For years, Google executives have argued that AI chatbots and related features would not significantly erode its search business. But as consumers shift to ChatGPT, Claude and Google's own AI features, investors worry this will hit the company's core profit engine. Alphabet Chief Executive Sundar Pichai is under growing pressure to justify more than $1 trillion in future payment obligations for data centers, computing power and electricity.
Thomas Monteiro, a senior analyst at Investing.com, said: "This quarter feels like a pivotal moment for Alphabet: either Pichai and his team solve the AI monetization problem, or the giant could lose its lead in several core businesses in the near future." Monteiro said that unless Google proves it can charge for AI the way it once charged for search ads, every capex forecast it publishes will look less like a display of ambition and more like a bill.
Google is building AI infrastructure for itself and its customers, pushing capital expenditure to record levels. The company is using AI to revamp popular products such as its search engine, YouTube and Gmail, but those efforts have yet to generate the revenue investors expect to justify its huge spending.
In the third quarter, total revenue for Google Services was $96.3 billion, below the expected $98.4 billion. YouTube advertising revenue was $11.2 billion, also below expectations. The company's free cash flow was negative for a second consecutive quarter, the first time that has happened since its listing.
Alphabet's equity investments also weighed on profit. Those investments recorded an $8.7 billion loss, largely tied to Alphabet's stake in SpaceX. That contrasts sharply with investment gains a year earlier and a huge gain in the second quarter, which mainly came from SpaceX and an investment in a private company later identified as Anthropic PBC.
Alphabet's third-quarter net profit per share was $2.12, far below Wall Street's expectation of $2.99. One bright spot in the earnings was Google Cloud, seen as a key gauge of demand for the company's AI products and hosting services. Google Cloud revenue was $30.7 billion and profit was $11.1 billion, both above analysts' expectations of $29.1 billion and $9.8 billion. Major customers for that business include startups such as Anthropic that compete with Google in the AI race.
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