Alphabet's third-quarter Google services revenue hit $96.3bn, missing the $98.4bn Street estimate, and shares fell more than 7.5%.
Ed Ludlow says search grew 12% yet search revenue missed, leaving unclear whether AI is eroding Google Search or strengthening it.
Alphabet posted negative $9.1bn free cash flow while guiding 2026 capital expenditure to $195bn to $205bn, versus Microsoft's nearly $19bn positive free cash flow.
Alphabet's search miss revives fears AI is eroding Google's ads
Alphabet's third quarter revived the fear that AI is eroding Google Search. Google says AI features are lifting queries, yet search revenue missed, so usage and monetization appear to be drifting apart. Investors also punished the company for AI infrastructure spending that has pushed free cash flow deeply negative while cash-rich peers rallied.
Takeaways
Alphabet missed on search and services revenue. Search and other revenue was $63.35bn against a $64.85bn estimate. Google services came in at $96.3bn versus $98.4bn. Total revenue of $111.21bn fell just short of $111.29bn. Shares dropped more than 7.5% after hours.
AI's effect on Search remains genuinely unclear. Ed Ludlow says search grew 12% while search revenue did not. Google credits AI Overviews and AI Mode with driving query growth. Search is still over half of revenue, and analysts will press on whether usage can rise without hurting monetization.
Negative free cash flow amplified the selloff. Alphabet posted negative free cash flow of $9.1bn, worse than just under negative $6bn the prior quarter. Microsoft generated almost $19bn. Ludlow says cash generators like Nvidia and Apple have led megacaps since last earnings, while negative-cash-flow names lagged.
Cloud is booming but capex runs far ahead. Google Cloud revenue reached $30.71bn, beating the $29.1bn estimate, and Ludlow calls its growth astonishing. Alphabet spent about $132bn in nine months and guided 2026 capex to $195bn to $205bn, versus roughly $25bn a quarter a year earlier.
Huge AI usage has not yet shown returns. The Gemini app reached 1bn users, and the APIs process about 32bn tokens per minute. YouTube Music and Premium passed 150m subscribers. Bloomberg reporters Julia Love and Dave Alba read the sales and profit miss as insufficient return on AI investment.
Search changes are already reshaping small businesses. Carol Massar cites Christina Stembel of Farm Girl Flowers, who had to completely change her business after Google's search changes hurt it and is now optimizing for large language models. Anchors say fears of LLMs eating Search had seemed to recede until this quarter.
Hyperscalers should not be judged as one group. Microsoft rose about 4.3% on better-than-expected cloud revenue as Alphabet fell. The anchors argue the hyperscalers have different core businesses, and the market still values Alphabet as a search company whose AI spending must lift that core.
Tap a name to go there · tap a line to see why they are linked