Alphabet Shares Drop 11% Amid AI Search Profitability Concerns
The company plans to continue investing in AI.
Alphabet, Google's parent company, saw its shares plummet over 11% in after-hours trading following the release of its quarterly earnings report. Investors were alarmed by massive spending on artificial intelligence, declining profits, and slowing growth in its search business.
Quarterly revenue for Alphabet increased by 25% year-over-year, reaching $127.6 billion, but earnings per share came in at $2.12, below analysts' expectations of $3.01. Net income fell to $26.2 billion, partly due to an $8.7 billion loss from investments.
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During the quarter, Alphabet allocated $51.4 billion for capital expenditures, up from $24 billion a year earlier. The full-year forecast remains at $195-205 billion, while free cash flow was negative at minus $9.1 billion.
At the same time, Google faced challenges with the profitability of its AI-based search. Chief Commercial Officer Philipp Schindler acknowledged that monetization in AI Mode currently lags behind the traditional search system, with search revenue growing by 12% compared to 17% in the previous quarter.
The standout positive from the report was the cloud business: Google Cloud's revenue more than doubled to $30.71 billion, exceeding analysts' forecast of $29.57 billion. However, the success of the cloud division could not alleviate investor concerns about the return on AI investments.
In 2027, Alphabet plans to significantly increase capital expenditures again. CEO Sundar Pichai explained that the company is not seeking quick returns on its investments.
