Alphabet reported third-quarter revenue of $127.6 billion, marking a 25 percent increase year-on-year but falling short of analyst expectations of $128 billion. The company also posted a 25 percent decline in net income, which dropped to $26.2 billion for the three months ending in September. Shares of Alphabet declined by 9 percent in after-hours trading following the earnings release.
The company’s results highlighted ongoing concerns about its substantial investments in artificial intelligence (AI) and cloud infrastructure. Alphabet recorded its second straight month of negative free cash flow, reporting a deficit of $9.1 billion for the quarter. This downturn reflects the company’s heavy spending to expand its cloud capacity, seen as critical to its long-term AI ambitions. Capital expenditures in the quarter reached $51.3 billion, up from $44.9 billion in the previous quarter, and higher than prior guidance.
Alphabet ranks as the world’s third-largest cloud services provider, trailing Amazon Web Services and Microsoft Azure. Its cloud revenue surged 103 percent year-on-year to $30.7 billion, surpassing analyst estimates of roughly 95 percent growth and exceeding the 81.8 percent increase seen in the previous quarter. The strong cloud performance has been regarded as a key indicator of whether Alphabet’s AI-focused infrastructure investments can ultimately drive meaningful revenue expansion.
Top executives, including CEO Sundar Pichai, have emphasized the strategic importance of AI in supporting growth. Pichai noted that AI investments are contributing to overall search query growth, with the current year-over-year increase being the highest in five years. However, the search business generated $63.4 billion in revenue in the quarter—up 12 percent from a year earlier but below the average forecast of $64.9 billion. Alphabet continues to face competition from AI chatbots that challenge its dominance in search, although its Gemini AI model has helped to mitigate some pressures.
Additional milestones included reaching one billion users for the Gemini app, making it Google’s fastest-growing product, and exceeding 150 million subscribers for YouTube Music and Premium services. YouTube’s advertising revenue increased by 9.2 percent to $11.2 billion in the quarter, bolstered by new AI-powered tools aimed at improving engagement for both creators and viewers.
Alphabet also announced the launch of a new advanced AI model, Argon, targeting competition with industry peers such as Anthropic and OpenAI. Market watchers have noted rising risk sentiment around Alphabet’s AI spending, as reflected by a 16 percent increase this month in the price of its five-year credit default swaps, reaching a record high on Friday.
Overall, Alphabet’s earnings underscore the balancing act between heavy investment in AI and cloud infrastructure and near-term financial performance, as the company seeks to maintain leadership amid intensifying competition in digital advertising and cloud computing.