Alphabet Cash Flow: AI Spending Triggers First Negative Quarter in 22 Years

Alphabet reported its first negative free cash flow in 22 years of public trading on Wednesday, a stark shift for the company as it accelerates spending on artificial intelligence. The tech giant posted a $9.1 billion deficit, far below analyst expectations of a near break-even result.

Total revenue for the third quarter ended September 30 came in at $127.6 billion, missing the Wall Street estimate of $128.2 billion. Advertising revenue, the company's primary engine, fell short by $1.4 billion, landing at $82 billion against an expected $83.4 billion. Net income available to common shareholders dropped 25 percent to $26.17 billion, while adjusted earnings per share of $2.67 missed the target of $3.02.

The cash burn was driven by aggressive infrastructure upgrades. Alphabet spent $5.9 billion in the quarter on capital expenditures, a move Chief Financial Officer Anat Ashkenazi linked to boosting cloud capacity and funding AI development. She told analysts the company plans to raise its 2027 capital expenditure forecast from this year's range of $195 billion to $205 billion, though a specific 2027 figure was not yet set.

Investors reacted sharply to the financial strain. Shares fell 10 percent in after-hours trading. Dave Wagner, portfolio manager at Aptus Capital Advisors, noted that the market is worried about AI cannibalizing the search franchise. "In a market worried about AI cannibalising the franchise, investors need to see search accelerating, not decelerating," Wagner said.

Chief Business Officer Philipp Schindler attributed the slowdown in search advertising to the adoption of AI Mode, a chatbot interface currently in testing. He announced that Google will begin rolling out advertisements in AI Mode to international markets. Meanwhile, Google Cloud revenue more than doubled to $30.71 billion, exceeding estimates and helping offset the ad shortfall.

Thomas Kurian, CEO of Google Cloud, joined the earnings call for the first time. He stated that sales of tensor processing units, which compete with Nvidia chips, have become a meaningful contributor to the business. The company's cloud backlog has grown to $561 billion, with more than 55 percent expected to be recognized as revenue in the next 24 months.

Rival Microsoft, which also reported results on Wednesday, saw shares rise more than 5 percent on positive free cash flow. The contrast underscores the market's sensitivity to capital intensity. Jeremy Saltsburg, senior investment officer at Check Capital, warned that a potential $300 billion capex figure could scare the market given the current negative cash flow position.