Alphabet erases a record US$500 billion as AI eats into sales

Skip to Content News Archives Economy Defence Energy Oil & Gas Renewables Electric Vehicles Mining Commodities Agriculture Real Estate Mortgages Mortgage Rates Finance Banking Insurance Fintech Cryptocurrency Defence Work Wealth Smart Money Wealth Management Investor Personal Finance Family Finance Retirement Taxes High Net Worth FP Comment Executive Women Puzzmo Newsletters Financial Times Business Essentials More Innovation Information Technology FP500 Podcasts Small Business Lives Told Tails Told Shopping Financial Post Store Obituaries Place a Notice Advertising Advertising With Us Advertising Solutions Postmedia Ad Manager Sponsorship Requests Classifieds Place a Classifieds ad Working Profile Settings My Subscriptions My Offers Newsletters Customer Service FAQ News Economy Energy Mining Real Estate Finance Defence Work Wealth Investor FP Comment Executive Women Puzzmo Newsletters Financial Times Business Essentials This advertisement has not loaded yet, but your article continues below.HomeInvestorAlphabet erases a record US$500 billion as AI eats into salesThe Google parent's shares fell more than 13 per cent, for its biggest-ever market value wipeoutAuthor of the article:Julia Love and Davey AlbaLast updated 18 minutes ago Over the past few years, Google has been working to reinvent its search engine for the AI age, trying to keep consumers in the habit of relying on its answers as chatbots become more popular. Photo by David Paul Morris/BloombergAlphabet Inc.’s shares fell more than 13 per cent, for its biggest-ever market value wipeout of more than US$500 billion, after the company reported disappointing search and advertising sales that reinforced investor concerns about AI’s threat to its core business.THIS CONTENT IS RESERVED FOR SUBSCRIBERS ONLYSubscribe now to read the latest news in your city and across Canada.Exclusive articles from Barbara Shecter, Joe O'Connor, Gabriel Friedman, and others.Daily content from Financial Times, the world's leading global business publication.Unlimited online access to read articles from Financial Post, National Post and 15 news sites across Canada with one account.National Post ePaper, an electronic replica of the print edition to view on any device, share and comment on.Daily puzzles, including the New York Times Crossword.SUBSCRIBE TO UNLOCK MORE ARTICLESSubscribe now to read the latest news in your city and across Canada.Exclusive articles from Barbara Shecter, Joe O'Connor, Gabriel Friedman and others.Daily content from Financial Times, the world's leading global business publication.Unlimited online access to read articles from Financial Post, National Post and 15 news sites across Canada with one account.National Post ePaper, an electronic replica of the print edition to view on any device, share and comment on.Daily puzzles, including the New York Times Crossword.REGISTER / SIGN IN TO UNLOCK MORE ARTICLESCreate an account or sign in to continue with your reading experience.Access articles from across Canada with one account.Share your thoughts and join the conversation in the comments.Enjoy additional articles per month.Get email updates from your favourite authors.THIS ARTICLE IS FREE TO READ REGISTER TO UNLOCK.Create an account or sign in to continue with your reading experience.Access articles from across Canada with one accountShare your thoughts and join the conversation in the commentsEnjoy additional articles per monthGet email updates from your favourite authorsSign In or Create an AccountThe Google parent reported sales, excluding partner payouts, of US$111.2 billion for the third quarter, falling short of analysts’ projections. Ad sales from search and other channels — a business line that accounts for roughly half of overall revenue and is critical to financing the massive AI investments — also missed forecasts, growing at the slowest pace in five quarters.This advertisement has not loaded yet, but your article continues below.The results and share reaction “show us the margin for error when a hyperscaler spending hundreds of billions on the AI infrastructure buildout” posts disappointing results in its core business, JPMorgan Chase & Co. analysts including Doug Anmuth said in a note.Canada's best source for investing news, analysis and insight.By signing up you consent to receive the above newsletter from Postmedia Network Inc.A welcome email is on its way. If you don't see it, please check your junk folder.The next issue of Investor will soon be in your inbox.We encountered an issue signing you up. Please try againThe shares declined 13 per cent to US$281.37, wiping US$511 billion from Alphabet’s market value as of 9:35 a.m. in New York. The company’s performance stood in particularly stark contrast to rival Microsoft Corp., which reported growth in its cloud business that surpassed Wall Street’s expectations while keeping its spending in check.Chief business officer Philipp Schindler said in an earnings call with investors late Wednesday that the growing popularity of AI Mode, a new tab in Google Search, took a toll on the company’s results. AI queries have “lower monetization,” Schindler said, though he added that the company was optimistic and has plans to bring more ads to that part of the search engine.For years, Google executives have argued that AI chatbots and features won’t cut significantly into its search business. But investors have worried about the impact on the company’s cash cow as consumers turn to rivals ChatGPT, Claude and Google’s own AI features.This advertisement has not loaded yet, but your article continues below.The pressure is mounting on Alphabet chief executive officer Sundar Pichai to justify the more than US$1 trillion that Google is facing in future payments on resources such as data centres, computing and energy to power his AI ambitions. “This quarter feels like a moment of truth for Alphabet: Either Pichai and his team fix the way the company monetizes AI, or the giant risks losing its leadership in several of its core businesses in the near future,” said Thomas Monteiro, senior analyst at Investing.com.“Until Google shows it can charge for AI the way it once charged for search ads,” he said, every capital spending forecast it issues is going to “read less like ambition and more like a bill.”Google’s sprint to build AI infrastructure for both itself and customers has sent the firm’s capital expenditures soaring to record levels. The company is working to overhaul popular products such as the search engine, YouTube and Gmail with AI. But those efforts have yet to yield the kind of revenue the investors want to see to justify all the spending.Google’s overall services revenue totalled US$96.3 billion in the third quarter, below estimates for US$98.4 billion. YouTube advertising sales of US$11.2 billion also fell below projections.This advertisement has not loaded yet.This advertisement has not loaded yet, but your article continues below.In the meantime, Google’s AI bets are getting even more expensive. By the end of the third quarter, Google’s future commitments to buy resources such as computing power and energy totalled US$924 billion. Upcoming obligations such as data-centre leases that haven’t yet commenced hit US$152 billion, bringing the company’s total future obligations to well over US$1 trillion.For the second quarter in a row, the company posted negative free cash flow, something it had, up until now, never seen since going public.“Search still generates the bulk of Alphabet’s cash, and two straight quarters of negative free cash flow show the pure AI math isn’t working right now,” said Anders Bylund, contributing tech analyst at the Motley Fool.Alphabet said in July that capital expenditures will reach as much as US$205 billion this year, more than double what it spent last year. AI requires massive amounts of computing power, and Google is racing to build data centres so it can meet demand for AI from consumers, businesses and its own employees.Alphabet’s equity investments also weighed on the company’s bottom line. Those stakes posted an US$8.7 billion loss, in large part due to Alphabet’s Space Exploration Technologies Corp. (SpaceX) position. That is a sharp reversal from the gains it saw a year earlier and the windfall in the second quarter that was mainly driven by SpaceX and an investment in a private company that Bloomberg later identified as Anthropic PBC.This advertisement has not loaded yet, but your article continues below.Its third-quarter net income was US$2.12 a share, falling far below Wall Street’s estimate of US$2.99.One bright spot in the report was Google Cloud, which is seen as a key gauge of demand for the company’s AI products and hosting services. The division reported sales of US$30.7 billion and profit of US$11.1 billion, surpassing analyst estimates of US$29.1 billion in revenue and US$9.8 billion in profit. Among the unit’s biggest customers are startups such as Anthropic that compete with Google in the AI race.“Cloud is booming, but many of its best customers are building assistants that are already beating Google with consumers,” Monteiro wrote. “Right now, Alphabet earns more selling AI to its rivals than using it itself, and that gap should keep growing over the next few quarters unless its models change drastically, and quickly.”Over the past few years, Google has been working to reinvent its search engine for the AI age, trying to keep consumers in the habit of relying on its answers even as chatbots from OpenAI and Anthropic become more popular. The company now delivers AI-generated answers in response to many searches, a shift that has had major implications for businesses that have traditionally relied on the search giant for traffic and advertising revenue.This advertisement has not loaded yet, but your article continues below.Google has worked particularly hard on building an edge by generating more personalized responses to questions, leveraging years of information about its users. In recent months, though, the company has fallen behind Anthropic and OpenAI in developing AI coding tools. Google recently released Gemini 4, which it says excels in areas such as coding and cybersecurity, though some employees fear the company has yet to fully catch up.Hours before its earnings call, Google announced yet another new AI model known as Carbon, a potential answer to the critics who have called for the company to speed up the pace of AI development.“We have more models coming soon,” Pichai told analysts on the call, “including more efficient versions to help developers optimize for speed and cost and to deploy across our billions of users.”—With assistance from Mark Bergen and Subrat Patnaik.We apologize, but this video has failed to load.This advertisement has not loaded yet.Notice for the Postmedia NetworkThis website uses cookies to personalize your content (including ads), and allows us to analyze our traffic. Read more about cookies here. By continuing to use our site, you agree to our Terms of Use and Privacy Policy.