Alphabet shares nosedived 13% in early trading on Thursday. Investors reacted sharply to a third-quarter earnings report that revealed worse-than-expected negative free cash flow. If Alphabet closes more than 9.77% lower on Thursday, it would be its worst post-earnings reaction ever since going public in 2004. The financial hit seemed to catch the market off-guard.
While Microsoft shares held steady, Alphabet's numbers drew intense scrutiny. The tech giant reported a negative free cash flow of $9.07 billion, a figure that far surpassed the $2.70 billion analysts had predicted. Yet, Alphabet stuck to its guns, maintaining its full-year capital expenditure guidance of between $195 billion and $205 billion.
Microsoft, on the other hand, reported a 27% drop in free cash flow, which landed at $18.63 billion. Despite the decline, the figure remained positive. Microsoft's capital expenditures and finance leases came in at $45.2 billion, which was a 30% jump from the previous year but still below the $50.67 billion that analysts had expected.
The earnings reports have arrived at a time when tech companies face intense scrutiny over their investments in artificial intelligence. Investors are watching closely to see how these hefty expenditures translate into returns. Ben Barringer, Quilter Cheviot's global head of technology research, remarked that Microsoft's methodical approach to building its architecture led to fewer surprises for investors. In contrast, Alphabet faced criticism for its earnings results and call.
Alphabet's core search business is also feeling the heat. Revenues rose to $63.35 billion but still fell short of what analysts had expected. Philipp Schindler, Alphabet's chief business officer, pointed to lower monetization within the company's AI Mode as a pressure point. He noted that Alphabet is now expanding ad placements in its AI Overviews and AI Mode products, even in international markets.
Competition from AI chatbots like OpenAI's ChatGPT and Anthropic's Claude has intensified, possibly diverting search queries away from Google. Google's own AI chatbot, Gemini, has struggled to keep up with its rivals. Barringer commented on Google's strategic dilemma, stating the company is torn between safeguarding its core business and embracing change. This uncertainty has left Google lagging behind in agentic AI.
