Alphabet took a hit on Wall Street, with its stock tumbling more than 10% after the tech giant released its third-quarter financials. The numbers showed a troubling dip in free cash flow, putting a spotlight on Alphabet's hefty spending on artificial intelligence. Investors are wary.
The company did see a 25% jump in revenue from last year, but that wasn't enough. For the first time in nearly four years, Alphabet missed both revenue and profit targets. Net income slid to $26.17 billion, or $2.12 per share, down from $34.98 billion, or $2.87 per share, the year prior. Free cash flow was a big concern, coming in at a negative $9.07 billion, which was well under the $2.70 billion analysts had expected.
Alphabet's capital expenditures hit $51.36 billion in the third quarter, falling short of the $55.09 billion analysts had projected. The company stuck to its full-year capital spending plan, which it had already raised to between $195 billion and $205 billion in the second quarter. Going forward, Alphabet anticipates its annual capital expenditures will top $300 billion by 2027.
On an earnings call, finance chief Anat Ashkenazi remarked that they expect capex to increase significantly in 2027 and will provide further details on their Q4 call. Meanwhile, long-term debt ballooned to $125.1 billion, a staggering 479% jump from $21.6 billion a year ago.
Operating income was reported at $40.58 billion, missing the $43.19 billion that FactSet had predicted. Alphabet's equity investments, which had boosted revenue by $99.03 billion in the second quarter, swung to an $8.66 billion loss in the third.
Cloud Division and AI Expansion
Alphabet's push into AI has supercharged growth in its cloud division, where its AI services are hosted. Cloud revenue more than doubled to $30.7 billion, beating the $28.7 billion analysts had expected. The company is making inroads against rivals like Amazon Web Services and Microsoft Azure.
Google Cloud CEO Thomas Kurian, speaking publicly on an earnings call for the first time, pointed to "extraordinary demand and strong growth" from AI labs and sectors like capital markets, financial services, and enterprises. Still, Jefferies analyst Brent Thill mentioned on CNBC's Closing Bell: Overtime that the cloud segment was the only one to slightly exceed expectations.
Search revenue rose by 12% to $63.35 billion, though it missed the $64.96 billion estimate. Pichai credited the highest query growth rate in five years to the company's AI investments.
