Google’s Flashy New Model Gets Outshone By Its Financial Troubles

Google’s free cash flow continued tanking in its third quarter of the year. The tech giant had reported its first negative free cash flow figure as a public company back in July in its second quarter earnings, when it came in at negative $5.9 billion. On Wednesday, Google reported that number had dropped even lower to negative $9.07 billion. The quarterly revenue of $127.58 billion also missed market expectations, and the tech giant reported that its long-term debt was up to $125.1 billion. The company also shared that it had made future purchase commitments of roughly $1 trillion. Meanwhile, executives shared that they are planning to spend significantly more money in the next fiscal year than they did this year. Google is expecting to have spent somewhere between $195 billion and $205 billion this fiscal year. The vast majority of that money is going towards AI infrastructure, Google’s chief financial officer Anat Ashkenazi said on the earnings call, and the capex investments, in turn, drove the free cash flow drop. Google executives tried to convince analysts on the earnings call that the return on that hefty AI investment would be huge. AI is already driving the highest Search query growth in half a decade, CFO Ashkenazi said, and there is sizable interest in demand for its AI-related subscription plans. “We expect to generate an attractive ROIC [return on invested capital] that remains meaningfully above our cost of capital, and anticipate generating strong cash flow from operations,” Ashkenazi said, promising fruits of that labor in the long term before bracing investors for continued troubles in the short term. “Our sizable investments in technical infrastructure and inventory build of TPU systems as we scale that business will put pressure on free cash flows.” Google’s chief business officer Philipp Schindler said that growth in the number of queries directed to Google’s AI Mode function was so strong that it could have had an impact financially as well because AI Mode has “lower monetization.” But Google is looking to change that, Schindler said, by increasing the ad saturation in both AI Mode and AI Overviews. Right before Google posted the numbers, the tech giant also debuted Carbon, a new frontier model that it is promoting as its strongest one yet. “It’s our strongest frontier model with state-of-the-art cybersecurity and long-horizon capabilities,” Google CEO Sundar Pichai said on the call. “It ranks number one on the recently updated Artificial Analysis Intelligence Index at 59.” The model is deployed internally, Pichai said, claiming that it will help Google boost productivity so much that the next year would be a “golden year.” Externally though, Carbon will only be made available to a “subset of trusted cyber defenders before we expand access,” Pichai said. The model is apparently being tested first by the Trump administration. Still, none of the promises, whether it be ROI expectations or new advanced AI models, seemed to convince investors, as shares were down roughly 11% after market close. Google’s recent struggles are particularly interesting. The tech titan is investing heavily in AI and launching some strong models and infusing the technology across its entire business, including deep across its moneymaker product, Google Search. And by their own measures, users are adopting Google’s AI initiatives too. But those wins are still not showing up in its financial results, and on the contrary, are aiding these record free cash flow drops. Google’s results come at a time when the AI bubble question is once again starting to crowd market experts’ minds. Last month, investor Michael Burry said that he is expecting an AI bubble burst to “play out over the next year.” The picture also doesn’t seem great outside of tech. Last week, Apollo Global Management’s chief economist Torsten Slok wrote in a note that AI was failing to drive the promised revenue growth in much of the business world. “Despite massive investments and widespread hype around artificial intelligence, the technology has delivered zero financial payoff to corporate America outside of tech,” Slok wrote.