In pre-market trading, Alphabet (NASDAQ: GOOGL) shares tumbled roughly 10%, while Microsoft (NASDAQ: MSFT) shares rose nearly 3%. Investors turned their attention to the two tech giants' latest third-quarter earnings reports, focusing on capital expenditure and free cash flow figures.
If Alphabet's decline exceeds 10% by Thursday's close, it would mark the company's worst post-earnings stock reaction in history. Based on pre-market prices, the company is expected to shed approximately $396 billion in market value.
Microsoft's third-quarter capital expenditure and finance lease spending reached $45.2 billion, up 30% year-over-year but below analysts' expectations of $50.67 billion. During the same period, Microsoft's free cash flow fell 27% to $18.63 billion, though it remained positive.
By contrast, Alphabet's third-quarter free cash flow came in at negative $9.07 billion, far below analysts' expectations of negative $2.7 billion. The Google parent maintained its full-year capital expenditure guidance unchanged, projecting annual capex between $195 billion and $205 billion.
The earnings release comes as investors are closely scrutinizing technology companies' artificial intelligence spending plans and focusing on how much return these investments can actually deliver. An analyst noted that Microsoft is expanding its technology infrastructure in a relatively prudent and measured manner, making earnings surprises less likely. By comparison, Alphabet delivered a rather messy earnings report, and its handling of the earnings call was less than satisfactory, which dealt a blow to its stock price in after-hours trading.
Search advertising is Alphabet's largest revenue source. In the third quarter, this business grew 12% year-over-year to $63.35 billion, but still fell short of analyst expectations, adding further downward pressure on Alphabet's stock. Alphabet's Chief Business Officer, Philipp Schindler, said that some of the impact on the search business stems from the lower monetization capability of the company's AI Mode product. He also stated that Alphabet is currently expanding ad placements across its AI Overviews and AI Mode products, including in international markets.
With the rise of AI chatbots such as OpenAI's ChatGPT and Anthropic's Claude, Google's search business is facing increasingly greater challenges. Users may be shifting more of their search needs to platforms outside of Google. Meanwhile, Google's own AI chatbot Gemini has also failed to keep pace with its competitors. An analyst commented that Google's problem lies in being caught in a so-called "innovator's dilemma" — whether to protect its existing core business or proactively embrace change and participate in disruptive innovation. Struggling to make this choice, Google's Gemini has lost its competitive edge and fallen behind peers in the agentic AI space.
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