Story
Oct 29, 2026
Alphabet’s AI boom is growing fast—but investors fear search is paying the price
Alphabet’s third-quarter revenue and cloud growth were strong, but a search slowdown, lower AI-search monetization and swelling capital spending sent investors running. The company argues its AI push is building the next engine of growth.
Alphabet entered its third-quarter earnings report with a powerful growth story—and left it with investors questioning whether its AI strategy is becoming too expensive to sustain.
Wednesday: The company reported revenue of $127.58 billion, up 25% year on year, while net income fell to $26.17 billion from $34.98 billion. Earnings of $2.12 a share missed Wall Street expectations, in part because of an $8.7 billion loss on equity investments.1 Sundar Pichai nevertheless cast the quarter as evidence that Alphabet’s broader machine is working, saying it had reached a “half-trillion annual revenue run rate.”
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The clearest bright spot was Google Cloud. Revenue more than doubled to $30.7 billion as companies bought AI infrastructure and services, reinforcing Alphabet’s claim that its full-stack approach—from chips and data centres to Gemini models—can turn the AI rush into durable business.3 Pichai’s position is that AI is also expanding search usage; he said query growth was the strongest in five years.2
But the market focused on a more uncomfortable gap between use and revenue. Search and other advertising sales rose 12% to roughly $63 billion, missing forecasts and slowing sharply from 19% growth in the first quarter and 17% in the second.4 Google’s Philipp Schindler acknowledged that conversational AI Mode searches bring “lower monetisation” than traditional results, with fewer and cheaper ads.5
Thursday: Shares fell about 13%, putting Alphabet on course for its worst post-earnings decline and erasing roughly $500 billion in market value.5 The sell-off was also a verdict on cash: free cash flow reached negative $9.1 billion as quarterly capital expenditure climbed above $50 billion, while Alphabet kept its 2026 spending outlook at $195 billion to $205 billion.5
Alphabet says the spending is necessary to fulfil cloud demand and eventually bill customers for new systems. Skeptics see an innovator’s dilemma: the company must push AI forward while it disrupts the search advertising engine that has long paid the bills.6