Alphabet falls 12% as AI spending pushes cash flow negative
Alphabet (NASDAQ: GOOGL) shares fell 12.75% to $283.47 in early trading on Thursday, down from Wednesday’s $324.89 close. The selloff followed third-quarter results that showed the AI build-out working on the demand side and failing to pay for itself on the cash side. CNBC reported it was the company’s first miss on both revenue and earnings in nearly four years. (BlockWest’s first report on the results has the headline numbers.)
The numbers
Revenue rose 25% year over year to $127.58 billion, slightly below the $128.22 billion LSEG consensus. Adjusted earnings per share came in at $2.67 against $3.02 expected. On a GAAP basis, net income fell to $26.17 billion, or $2.12 per share, from $34.98 billion a year earlier.
Part of the profit decline was a non-operating hit: other income and expense was negative $8.2 billion, mainly an unrealized loss on Alphabet’s SpaceX stake. Strip that out and the quarter still missed, which is why the market did not treat it as a one-off.
Cloud is the bull case
Google Cloud revenue grew 103% to $30.7 billion. That is the clearest evidence yet that enterprise AI demand is real and that Alphabet is winning share in compute. If this were only a cloud story, the stock would be up.
Search is the bear case
Search and other revenue grew 12% to about $63.4 billion, short of the roughly $65 billion analysts expected and slower than last quarter. On the call, chief business officer Philipp Schindler named currency as the largest driver of the slowdown, but also pointed to lower monetization in AI Mode, Google’s chat-style search product.
That second point is the one investors will remember. It is the first time management has tied weaker search revenue to its own AI product. The fear that AI answers earn less than ten blue links has moved from theory to the earnings call.
YouTube ad revenue rose 9% to $11.2 billion, also slightly below expectations.
The cash problem
Capital expenditures reached $51.36 billion in the quarter, about 40% of revenue, up from 23% a year ago. Operating cash flow was $42.29 billion. That left free cash flow at negative $9.07 billion, the second straight negative quarter.
Alphabet held full-year 2026 capex guidance at $195 billion to $205 billion and said 2027 spending will rise significantly, with details on the Q4 call. That comes after the company announced an $80 billion equity raise in June, including a $10 billion private placement from Berkshire Hathaway, to fund AI infrastructure. A company that historically bought back stock is now issuing it to build data centers.
How the hyperscalers compare
The market is now sorting AI spenders by whether they can show a path back to cash. Microsoft rose after its results. Oracle surged 11% after committing to $30 billion in free cash flow by fiscal 2029. Amazon reports tonight with a capex plan near $220 billion and no free cash flow recovery date yet.
Wedbush cut its Alphabet price target to $387 from $445 while keeping an Outperform rating, a sign that some on the Street see the drop as a valuation reset rather than a broken thesis.
The BlockWest read. We think this is the quarter the AI trade changed its test. For two years, capex was rewarded as proof of ambition. Now investors want a date when the spending turns back into cash, and Alphabet did not give one. Cloud at 103% growth says the demand is real. The question for Q4 is whether management can show the return curve before the 2027 number lands.
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