Alphabet’s Cloud Boom Can’t Calm Investors’ AI Spending Fears

Google Cloud revenue more than doubled to $30.7 billion, yet Alphabet shares sank more than 10% after Wednesday’s results. The split reaction captures investors’ main question: can a fast-growing AI business earn enough to pay for its huge buildout? For now, the cloud surge has not eased worries about weaker advertising and cash flowing out. ^4,5

Alphabet reported $127.6 billion in total revenue for the July-to-September quarter, up 25% from a year earlier but just below analysts’ forecasts. Google’s advertising business brought in $82.01 billion, short of expectations. Search sales rose 12% to $63.4 billion, slowing from 17% growth in the prior quarter, while YouTube ad growth eased to 9%.^3,5 CEO Sundar Pichai said AI was driving record growth in Search queries, including commercial searches. He also pointed to strong demand for the company’s AI tools and custom chips. ⁸

The advertising slowdown matters because ads remain Alphabet’s biggest source of income, while AI services require costly computing power. The company spent $51.4 billion on capital projects in the quarter, more than twice the year-earlier amount, and reported negative free cash flow of about $9.06 billion.^3,5 Cloud offered a brighter sign: its operating margin rose to 36.2% from 23.7% a year earlier, and operating income reached $11.1 billion.^1,5 But earnings per share fell to $2.12, partly because an $8.7 billion paper loss on investments reduced reported profit. ⁴

That paper loss is separate from the operating business, but investors must weigh it alongside the real cash cost of expansion. Alphabet expects capital spending of about $200 billion in 2026 and says it will rise significantly in 2027; one report put the 2027 figure at $300 billion.^1,5 The next test comes with the company’s fourth-quarter results and more details from its finance chief on spending. Investors will look for evidence that cloud demand and advertising can cover that bill. ^2,4