Alphabet shares drop as cash flow turns negative and spending plans grow

Alphabet shares dropped over 10% after the tech firm posted a steep drop in free cash flow and a miss on net income during the third quarter. Revenue grew 25% from a year ago to reach its fastest growth rate since 2021, but net income fell to $26.17 billion, or $2.12 per share, down from $34.98 billion a year earlier. Free cash flow turned sharply negative at $9.07 billion, missing analyst expectations of a $2.70 billion negative print. Capital expenditures reached $51.36 billion, falling short of the $55.09 billion expected by analysts as the company continues heavy spending on artificial intelligence infrastructure. Alphabet kept its full-year capital expenditures forecast steady between $195 billion and $205 billion, while finance chief Anat Ashkenazi told analysts that spending will increase significantly in 2027. Borrowing rose sharply during the quarter, with long-term debt climbing to $125.1 billion from $21.6 billion a year earlier, representing a 479% increase. Operating income reached $40.58 billion, missing the $43.19 billion forecast from FactSet. Equity holdings that previously brought in a major windfall in the second quarter resulted in a loss of $8.66 billion in the third quarter. Despite the broader financial misses, cloud revenue more than doubled to $30.7 billion, beating analyst estimates and taking market share from Amazon Web Services and Microsoft Azure. Google Cloud CEO Thomas Kurian noted extraordinary demand from AI labs and enterprises. Google's Gemini app also reached one billion users, while CEO Sundar Pichai highlighted strong demand for the Argon Gemini model and announced a newer Carbon iteration.

Context

Heavy spending on artificial intelligence data centers and chips has driven up capital costs across major technology companies. While cloud divisions are showing rapid revenue growth from these investments, investors are closely watching how rising expenses impact short-term cash reserves and overall profitability.