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Oct 29, 2026

Alphabet’s AI boom is growing fast—but investors fear search is paying the price

Alphabet sees its AI buildout as the route to faster growth in cloud, advertising tools and consumer products, while investors see a more immediate threat: the technology may be weakening the hugely profitable search business meant to fund it.

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. 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.”

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. Pichai’s position is that AI is also expanding search usage; he said query growth was the strongest in five years.

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. Google’s Philipp Schindler acknowledged that conversational AI Mode searches bring “lower monetisation” than traditional results, with fewer and cheaper ads.

Thursday: Shares fell about 13%, putting Alphabet on course for its worst post-earnings decline and erasing roughly $500 billion in market value. 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.

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.

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