Google Shares Tumble More Than 10% After Hours as Third-Quarter Revenue and Earnings Both Undershoot Expectations for the First Time in Four Years!

A 25% year-on-year increase took Alphabet’s revenue to $127.58 billion, its fastest growth since 2021, yet still below the market’s $128.22 billion forecast. Released after the close on 28 October, the earnings report revealed a marked divergence between businesses. At $2.67, adjusted earnings per share missed expectations of $3.02, while net income fell to $26.17 billion from $34.98 billion a year earlier. Not for nearly four years had Alphabet fallen short of both revenue and earnings forecasts. In after-hours trading, the shares lost more than 10% at one stage, surrendering more than six months of gains to trade at levels last seen around April this year.

Search Advertising Slows for a Third Consecutive Quarter as AI Monetisation Lags

The longer-term slowdown in search advertising is more telling than the quarterly revenue miss alone. Google Search and related businesses recorded revenue of $63.35 billion, a 12% year-on-year rise, against market expectations of $64.96 billion and buy-side forecasts for roughly 14% growth. Across advertising, revenue totalled $82.01 billion rather than the $83.57 billion expected. YouTube advertising contributed $11.12 billion, with growth of 9.2% year on year taking it below the psychological 10% threshold. For search advertising, growth has now weakened for three consecutive quarters: after 19% in the first quarter and 17% in the second, it slowed to 12% in the third. The pace of that deceleration is also increasing.

AI had lifted search query growth to its fastest rate in five years, Pichai stressed during the earnings call. He also described the Gemini 4 Argon and Carbon models as industry-leading and said first-party model APIs were processing nearly 32 billion tokens per minute, more than four times the year-earlier figure. There is no dispute that query volumes are increasing, just as there is no dispute that advertising revenue growth is weakening. Taken together, these trends suggest a structural difficulty: monetisation of AI-generated search experiences remains less efficient than that of traditional search advertising. Neither advertising inventory nor clicks have increased in proportion to query volumes. The relatively upbeat findings of a September Evercore ISI survey showed that Google remained the primary search tool for 78% of respondents, while 60% said adopting AI had led them to search more often. That measures behaviour, however, rather than the conversion of activity into revenue captured in the earnings report. More Google searches are not being matched by a corresponding increase in advertiser spending.

Cloud Alone Delivers an Upside Surprise

A substantial beat came from Google Cloud, where revenue of $30.71 billion represented year-on-year growth of 103%, well above the market forecast of $29.1 billion. The division generated operating income of $11.1 billion against an expected $9.8 billion, with its operating margin rising to 36.2% from 23.7% a year earlier. AI infrastructure and TPU system sales remain the principal drivers as Google Cloud gains share from AWS and Azure. Appearing on an earnings call for the first time, Google Cloud CEO Thomas Kurian specifically characterised demand across AI labs, capital markets, financial services and enterprise customers as “extraordinary and strong.”

For all that strength, cloud is neither large enough nor growing sufficiently to make up for weakness in the other two businesses. Advertising’s $82.01 billion in revenue is nearly three times cloud’s contribution. Consequently, a percentage point lost from advertising growth has a much greater effect on group revenue than a percentage point added to cloud growth. There is no questioning cloud’s 103% expansion; its ability to offset weakness effectively is nevertheless limited in a company still underpinned by advertising. In Jefferies analyst Brent Thill’s assessment, no business apart from cloud exceeded expectations. Framed by that “only,” the 103% increase highlights the scale of the misses elsewhere rather than standing in isolation.

Cash Flow Deterioration Exposes Growing Funding Strain

Alphabet’s third-quarter free cash flow deficit reached $9.07 billion, more than three times the negative $2.7 billion analysts had expected. With the preceding quarter also showing negative free cash flow of $5.9 billion, the company recorded back-to-back negative quarters for the first time in its 22 years as a listed business. On a trailing twelve-month basis, free cash flow was $19.7 billion, down 73% from $73.6 billion a year earlier.

The source of the deterioration becomes clearer in the underlying figures. Although capital expenditure rose 114% year on year to $51.36 billion, it was below the market’s forecast range of $55.09 billion to $55.78 billion. An outcome “below expectations” might, by itself, seem encouraging. Yet it was weaker operating cash flow, rather than a capital expenditure overshoot, that drove the worsening cash position. Operating cash flow for the quarter amounted to $42.3 billion, a 13% year-on-year decline from $48.4 billion and far short of the $53.9 billion expected by the market. Combining that contraction with a doubling of capital expenditure left the $9.07 billion deficit.

The strain is evident in the way Alphabet finances its spending, too. Compared with $21.6 billion a year earlier, long-term debt stood at $125.1 billion, a rise of approximately 479%. Debt started to bridge the shortfall when operating cash flow ceased to cover capital expenditure. A change in the financing structure, rather than simply a quarterly fluctuation, is therefore taking place.

Spending Is Set to Rise Further Under 2027 Guidance

More significant than the quarter’s capital expenditure was management’s indication of what comes next. CFO Anat Ashkenazi made the position explicit on the earnings call: “We continue to expect capital expenditure to increase significantly in 2027 and will provide more details on our fourth-quarter earnings call.” While full-year 2026 capital expenditure guidance stayed at $195 billion to $205 billion, the expected figure for 2027 is above $300 billion. Buy-side estimates for that year generally fall between $330 billion and $375 billion.

A quarterly spending undershoot sits alongside an outlook for a higher bill ahead. What matters to market pricing is not “$5 billion less spent this quarter,” but “more spending every quarter ahead, with no visible timetable for free cash flow to turn positive.” Combined investment in AI infrastructure by the four hyperscalers, Alphabet, Microsoft, Amazon and Meta, is expected to exceed $700 billion in 2026 and rise further in 2027. Descriptions of “spending less” are therefore relative within this capital expenditure race. The absolute amount continues to grow at an accelerating pace.

The sharp fall in net income was also partly attributable to a factor outside operations. A loss of $8.66 billion on equity investments during the quarter reduced earnings per share by approximately $0.55. Most of that loss arose from fair-value movements in holdings including SpaceX and Anthropic.

Highly volatile though this item is, it has no bearing on the operating quality of the core business. Its $99 billion contribution from investment gains in the second quarter had taken net income substantially above forecasts; by the third quarter, the direction had reversed to an $8.66 billion loss. Excluding equity investment effects still left adjusted earnings per share at $2.67, short of the $3.02 expected. Portfolio swings made reported earnings more variable, but cannot explain slowing advertising growth or weakening cash flow. It is those operating developments that warrant close examination.

Microsoft’s Performance Highlights the Market’s Preference for Cash Discipline

Azure revenue growth accelerated to 48% at Microsoft from 43% in the prior quarter, while capital expenditure of $39.37 billion undershot analysts’ $45.93 billion forecast. Despite a 27% year-on-year fall, free cash flow remained positive at approximately $18.63 billion. Microsoft shares advanced nearly 3% in after-hours trading.

By contrast, Google Cloud’s 103% expansion was more than twice Azure’s growth rate, yet came alongside negative free cash flow of $9.07 billion and a capital expenditure outlook exceeding $300 billion for 2027. The shares lost 10% after hours.

That contrast makes the market’s priorities in October 2026 plain. Cloud’s absolute growth rate counts, but sustainable cash flow and restraint in capital expenditure count for more. Although Azure grew more slowly, Microsoft’s mix of “below-expected capital expenditure + positive free cash flow” suggested an investment cycle with identifiable limits. Google’s faster cloud expansion, accompanied by “negative free cash flow + another significant increase in spending in 2027”, suggested no such clear boundaries. Both companies are committing hundreds of billions of dollars to capital expenditure. For investors, the choice turns less on “who grows faster,” than on “who gets free cash flow back into positive territory first.”

Whether an individual business had a good or bad quarter is not the fundamental issue in Alphabet’s results. Both cloud’s 103% growth and rising search query volumes are genuine. Rather, the visible increase in the cost of AI investment is outpacing the returns being realised. Search advertising’s slowdown over three consecutive quarters shows that AI’s benefits have not yet been fully realised in the core monetisation engine. Negative free cash flow for two consecutive quarters shows that capital expenditure has moved beyond the level operating cash flow can naturally fund. Meanwhile, guidance for a “significant increase” in 2027 signals management’s belief that investment must rise further.

Having said Alphabet had “returned to the forefront of AI technology.”, Pichai made its technological standing clear. A timetable for restoring positive free cash flow, however, is what the market now seeks. None was supplied in these results, and the 10% after-hours fall represents the value the market placed on that omission. Should the next quarter’s earnings call again offer only “a significant increase in 2027” and no concrete reference point for the route to returns, the market will price its diminishing patience in the same manner.