Alphabet's Cloud Business Doubles, but Heavy AI Spending Sinks Its Cash Flow

Alphabet reported third-quarter revenue of $127.6 billion on Wednesday, up 25 percent from $102.3 billion a year earlier. It was the company's 13th consecutive quarter of double-digit revenue growth, according to the earnings release filed with the Securities and Exchange Commission.

The headline number was not enough for investors. Revenue came in just short of the $128.2 billion analysts expected, according to LSEG data cited by Reuters. Shares fell about 9 percent in after-hours trading, to about $294, after closing the regular session at $324.89, according to CNBC market data.

Profit fell even as revenue rose. Net income available to common stockholders was $26.2 billion, down from $35.0 billion a year earlier. Diluted earnings per share were $2.12, down from $2.87 and short of the roughly $3.01 analysts expected.

Part of the drop came from outside the operating business. Alphabet recorded an $8.7 billion net loss on equity securities, which the company said cut earnings per share by $0.55. Operating income, by contrast, rose 30 percent to $40.6 billion, for a margin of 31.8 percent.

Cloud more than doubles

Google Cloud was the strongest part of the quarter. Revenue rose 103 percent to $30.7 billion, beating the $29.6 billion analysts expected. Alphabet is the third-largest cloud provider, behind Amazon Web Services and Microsoft's Azure, and it said enterprise demand for AI training and inferencing stayed strong through the quarter.

Chief Executive Sundar Pichai said the company is "now on a half-trillion dollar revenue run rate." Reuters reported that Alphabet's investments in its custom Tensor Processing Units, alongside third-party graphics processors, helped expand its capacity to serve that demand.

The core advertising business grew more slowly. Google Search and other revenue rose 12 percent to $63.4 billion, short of the $65.0 billion expected. YouTube ads grew 9 percent to $11.2 billion. Total Google advertising revenue was $82.0 billion, about $1.4 billion below expectations, according to Reuters.

The spending side

The number that moved the stock most was cash flow. Alphabet spent $51.4 billion on property and equipment in the quarter, up 114 percent from $24.0 billion a year earlier. Free cash flow came in at negative $9.07 billion, against analyst expectations of a cash outflow of just $36 million, according to LSEG. It was worse than the negative $5.86 billion of the second quarter.

Alphabet said it expects full-year infrastructure spending of $195 billion to $205 billion. Alphabet, Microsoft, Amazon, and Meta are projected to spend well over $700 billion combined in 2026 on data centers, chips, and networking, according to Reuters.

The quarter puts the AI spending debate in plain terms. Cloud demand is real, and it is growing fast. But the data centers and chips needed to meet it now cost more cash than the business generates in a quarter. Investors bought the growth story for years. On Wednesday evening, they priced the bill instead.