Alphabet reports $9.1 billion cash deficit as search ad revenue slows

Alphabet reported negative free cash flow of $9.1 billion in the third quarter, a figure that marked the first time the company has operated at a deficit in that metric in 22 years.

The result came as total revenue of $127.6 billion fell short of the $128.2 billion expected by analysts. Advertising revenue, which accounts for the majority of the company's income, came in at $82 billion, missing the $83.4 billion forecast by $1.4 billion.

The shortfall in the core search business was attributed by chief business officer Philipp Schindler to a larger than expected deceleration in growth. He cited the increased use of AI Mode, a chatbot interface for the search engine where the company is still testing advertising formats.

Investors reacted negatively to the results, sending Alphabet shares down 10 percent in after hours trading. The drop occurred despite strong performance in the company's cloud division, a contrast to rival Microsoft which saw shares rise more than 5 percent on positive cash flow results reported the same day.

The shift in financial performance represents a sharp turn for a company historically known as a prolific cash generator within the tech sector. The negative cash flow was driven by aggressive spending to boost cloud capacity and fund artificial intelligence development, which caused the company to burn $5.9 billion in the previous quarter.

Chief financial officer Anat Ashkenazi stated on a conference call that the company plans to increase capital expenditures for 2027. She noted that this year's spending is forecast at between $195 billion and $205 billion, with no specific number provided for next year. Ashkenazi also warned of near-term margin pressure from the use of third-party cloud capacity.

Dave Wagner, a portfolio manager at Aptus Capital Advisors, noted that investors in a market worried about AI cannibalizing the franchise need to see search accelerating rather than decelerating. He added that while cloud is carrying the narrative, the stock will likely trade lower until search demonstrates that AI is additive to the business.

Google Cloud revenue more than doubled to $30.71 billion in the quarter, exceeding analyst estimates. The unit, which is the third-largest cloud services provider globally, saw its backlog grow to $561 billion. Alphabet expects to recognize more than 55 percent of that backlog as revenue within the next 24 months.

Thomas Kurian, CEO of Google Cloud, appeared on the earnings call for the first time in this capacity. He stated that sales of Google's tensor processing units, which compete with Nvidia's GPU chips, had become a meaningful contributor to the business. The company began recognizing revenue from direct sales of these TPU systems, including associated hardware and software, in the previous quarter.

Net income available to common shareholders fell 25 percent to $26.17 billion. Adjusted earnings per share of $2.67 missed the Wall Street target of $3.02. The company announced plans to roll out advertisements in AI Mode to international markets in the coming period.