Shares of Alphabet Inc., the parent company of Google and YouTube, declined sharply following the release of its third-quarter financial results, reflecting investor concerns over slowing revenue growth in advertising and substantial spending linked to artificial intelligence (AI) infrastructure. Alphabet’s shares dropped more than 12%, wiping out over $500 billion in market value in one of the largest single-day declines in the company’s history.

For the quarter ending September 30, Alphabet reported revenue of $127.6 billion, a 25% increase from a year earlier but slightly below analysts’ expectations. The growth was largely driven by robust performance in Google Cloud, which generated $30.7 billion in revenue—a 103% rise year-over-year—and posted operating income of $11.1 billion, surpassing estimates. This division benefits from strong demand for cloud computing and AI tools, including sales of Alphabet’s proprietary AI chips, known as TPUs, which it also sells to external firms.

However, the company’s flagship advertising business showed signs of slowing. Advertising revenue increased 11% to $82 billion but missed forecasts, with growth in search and YouTube ads decelerating. Search ad revenue rose 12%, down from 17% growth in the previous quarter, while YouTube ad sales grew 9%, marking the slowest expansion pace in over a year. Alphabet’s chief business officer, Philipp Schindler, noted that the rising use of AI-powered features within Google Search has led to lower monetization, as new AI-generated queries typically yield fewer ad clicks. Despite this, the company expressed optimism about integrating more ads into AI-driven search experiences.

Alphabet’s net profit declined about 25% to $26.2 billion, or $2.12 per share, falling short of Wall Street estimates. The company booked an $8.7 billion loss on equity investments, largely due to its stake in SpaceX, whose shares have struggled since going public. Meanwhile, Alphabet reported negative free cash flow for the second consecutive quarter—a first since its public listing—primarily driven by higher investments in AI and infrastructure.

Capital expenditures surged to approximately $51 billion during the quarter, with the company maintaining its forecast to spend between $195 billion and $205 billion on data centers, AI chips, and related infrastructure for the full year. Alphabet’s CFO, Anat Ashkenazi, indicated that AI spending will increase significantly in 2027 as the company accelerates its AI ambitions. To fund these investments, Alphabet raised $28.7 billion through bond sales and $12.4 billion via new share issuance during the quarter.

CEO Sundar Pichai described the spending as part of a long-term planning strategy, emphasizing Alphabet’s commitment to AI development despite near-term profitability pressures. The company has intensified its AI product launches recently, rolling out new models such as Gemini 1 and a cybersecurity-focused version. Alphabet now processes approximately 32 billion AI tokens per minute, more than four times the volume from a year ago.

Investor reaction reflects broader uncertainties in the AI sector regarding whether the substantial investments in computing infrastructure and research will translate into sustained revenue growth. Rival companies like Microsoft have reported more favorable results from their AI-related cloud businesses, intensifying competitive pressures on Alphabet to demonstrate effective monetization of its AI capabilities.

Despite these challenges, Alphabet continues to leverage its dominant position in digital advertising and cloud computing while adapting its core offerings to an evolving AI landscape, seeking to balance innovation with profitability in a rapidly shifting market environment.