Google’s parent company fell on a negative cash-flow shock and a Search revenue miss. It is the second-biggest daily market-value loss on record, behind Nvidia’s.
Shares in Alphabet, Google’s parent, fell by more than 12% on Thursday, its worst day on record, wiping about half a trillion dollars off its value. Associated Press put the fall at roughly 12.6%. It is the second-biggest daily market-cap loss ever, just behind Nvidia’s $593bn on 27 January 2025. Analysts called it a reminder to tech firms not to miss earnings forecasts while investors are nervous about lofty valuations, especially in artificial intelligence (AI).
What spooked investors
Alphabet’s latest quarterly report showed it burning cash in the AI race, and Google’s search division apparently feeling the effect of AI competition. Search revenue growth came in at 12%, almost three percentage points short of market forecasts. Revenue from Search rose from $56.57bn to $63.35bn, against expectations of about $64.85bn, according to the research notes. That is a shortfall against forecasts, not a proven fall in Search usage.
Negative free cash flow of $9.07bn for the third quarter, more than triple the sum expected, also unsettled shareholders. Free cash flow turns negative when cash going out on operations and capital spending exceeds the cash a company brings in from regular business. The notes put operating cash flow at $42.3bn and capital expenditure at about $51.4bn. They say a $5.2bn payment relating to a European Commission fine imposed in 2018, made after the appeal process ended, was included. Without it, free cash flow would have been about negative $3.9bn. The deficit therefore partly reflects a legal payment as well as AI infrastructure spending.
A record $205bn investment bill is expected at Alphabet this year. The company has reaffirmed 2026 capital expenditure of $195bn to $205bn, and says investment will rise significantly in 2027, though it has not given a figure. Some analysts have discussed $300bn a year, which is not company guidance. Chief executive Sundar Pichai said ad queries were growing at their fastest pace in five years, which was not enough to stop the selling.
Kathleen Brooks, research director at the investment firm XTB, said: “The big problem for investors when it comes to AI is the cost of the payoff. Hundreds of billions of dollars are being spent by the hyperscalers to boost their AI capabilities, so investors want to know that it is worth it. Google has now reported two quarters of negative cash flow, and this is unacceptable for investors.”
She added: “The AI trade is not moving as a unified block. Investors are willing to reward good earnings results, for example, Microsoft is trading up 3.5% on Thursday morning, after it reported solid results that have impressed the market. Amazon will report results tonight, before Apple next week, which will test sentiment further.”
Strong areas
Net income fell from about $35bn to $26.17bn, and diluted earnings per share from $2.87 to $2.12, because of an $8.2bn negative non-operating item. Chief financial officer Anat Ashkenazi said it was mainly a fall in the value of Alphabet’s SpaceX investment, largely an accounting adjustment and not a cash payment.
The notes show growth elsewhere. Total revenue rose from $102.35bn to $127.58bn and operating income from $31.23bn to $40.58bn. Google Cloud revenue rose 103%, from $15.16bn to $30.71bn, and its operating income from $3.59bn to $11.12bn, lifting the margin from about 23.7% to 36.2%. Its contracted backlog reached $561bn, with about 55% expected to be recognised as revenue in 24 months. A backlog is not cash already collected. Alphabet also raised $28.7bn in new senior notes and $12.4bn from new share issues in the quarter, $41.1bn in total, and has $27.6bn left under its share-issuance programme.
Google is expanding ads in AI Mode into international markets, and says AI Mode searches are about three times longer than traditional ones.
The wider market
Associated Press reported that, although most S&P 500 companies rose, the major US indices fell, because of Alphabet’s weight in them. Tech valuations have not risen this year, and Meta and Alphabet are down on the year. Funding for the AI boom is under closer scrutiny as borrowing costs rise globally. SpaceX has gone public to raise cash, and Elon Musk recently warned that hundreds of “Neocloud” firms risked a “guppy-level death” because of a funding squeeze. Anthropic’s confirmed plan for a stock market flotation, reportedly aiming to raise $100bn next month, is another example, and is seen as a barometer of investor appetite.
