Alphabet shares fell more than 10% in after-hours trading after quarterly results exposed a growing divide between its rapidly expanding cloud business and the cash demands of its artificial intelligence buildout. Revenue and advertising sales narrowly missed market expectations, while free cash flow sank to negative $9.1 billion as the company spent heavily on data centers and paid a multibillion-dollar European Union antitrust penalty.
Alphabet reported quarterly revenue of $127.6 billion, up 25% from a year earlier. Advertising revenue reached about $82 billion, below consensus expectations, according to the companys results. The reaction in late trading erased most of the stocks gains from the preceding six months at one point, with traders focusing on the slowdown in search advertising growth and a wider-than-expected cash outflow.
Search advertising growth slows as AI queries change monetization
Google Search and other advertising revenue rose 12% year over year to $63.3 billion. That was below the $64.9 billion consensus forecast cited in the supplied market estimates, and represented a deceleration from 17% growth in the prior quarter.
Sundar Pichai, Alphabets chief executive officer, said AI-driven queries are roughly three times longer than traditional searches. Those interactions can encourage more detailed user engagement, but Alphabet said they currently generate less revenue per query, limiting the immediate advertising benefit from higher search activity.
The company said total search-query growth, including commercial searches, reached its fastest pace in five years. Visual searches in AI mode exceeded 50 billion a month, with Alphabet describing the bulk of that activity as incremental rather than simply replacing conventional searches.
The figures place Alphabet in a more difficult phase of its AI transition. Search volume is increasing, but the economics of AI responses have yet to match the established advertising model built around shorter, conventional queries. Longer answers also require substantially more computing capacity, making the gap between user engagement and revenue especially relevant while infrastructure costs are climbing.
Cloud business delivers record profitability
Google Cloud provided the clearest counterweight to the advertising miss. Alphabet said cloud revenue rose 103% from a year earlier to $30.7 billion, accelerating from roughly 82% growth in the preceding quarter.
The division generated operating profit of $11.1 billion, more than three times its year-earlier level. Its operating margin rose to a record 36.2%, from 23.7% a year earlier, showing that the cloud operation is producing stronger returns even as Alphabet expands its AI computing capacity.
Alphabets cloud backlog — contracted revenue not yet recognized in its accounts — climbed to $561 billion. More than 55% of that backlog is expected to be recognized within the next 24 months, according to the company.
That order book gives Alphabet unusually strong visibility into future cloud demand, particularly for AI infrastructure and enterprise software. Yet the company warned that cloud margins could face pressure in the fourth quarter because it is using more third-party computing capacity while supply remains constrained. Leasing outside capacity can help Alphabet meet customer demand sooner, but it is generally less profitable than serving workloads through its own infrastructure.
Capex and EU payment push free cash flow further negative
Alphabet reported negative free cash flow of $9.065 billion for the quarter, compared with negative $5.855 billion in the second quarter. The reported figure was also well below expectations of roughly negative $3.5 billion.
The company spent $51.4 billion on capital expenditures during the quarter and made a $5.2 billion cash payment related to a 2018 European Union antitrust fine. Excluding that payment, adjusted free cash flow would have been negative $3.865 billion, an improvement of about $1.99 billion from the previous quarter.
Alphabet said it expects 2025 capital expenditures of $195 billion to $205 billion and expects spending to rise again in 2027. The scale of that commitment explains why traders gave greater weight to cash flow than to the cloud units improving profitability.
The company is funding this expansion partly through Tensor Processing Units, or TPUs, its in-house chips designed for AI training and inference. Alphabet said all TPU system inventory corresponds to signed contracts and that it buys components only after contracts are in place. Cash spending can therefore arrive well before the company records revenue, particularly for large system deliveries expected in 2027.
Enterprise AI adoption supports the infrastructure spending case
Alphabet said it has sold more than 100 million knowledge worker seats across its AI services, while nearly 90% of Fortune 100 companies use Gemini Enterprise. BNP Paribas is rolling out the system to more than 65,000 employees, according to Alphabet, while Tata Steel has deployed more than 300 specialized AI agents across supply-chain and customer-service work over nine months.
The company also said its first-party model application programming interfaces processed nearly 32 billion tokens per minute, up 40% from the prior quarter and more than four times the level a year earlier. The Gemini apps user base has surpassed 1 billion, Alphabet said.
On the hardware side, Alphabet said its TPU 8T training chips deliver 2.7 times the performance of the previous generation, while TPU 8I inference chips offer 80% better price-performance. It has also worked with Meta on TorchTPU support for PyTorch workloads and expanded TPU distribution through partnerships including Oracle and Crux AI.
Alphabets results show a company with substantial demand for its AI products and cloud capacity, but one whose near-term financial profile is being shaped by the cost of supplying that demand. The market response suggests traders are willing to reward cloud growth and enterprise adoption, but expect clearer evidence that AI search can improve advertising revenue and that infrastructure spending can convert into cash generation on a predictable schedule.
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