Alphabet cash flow turns negative for first time in 22 years amid AI spending

Alphabet, the parent company of Google, reported negative free cash flow of $9.1 billion for the third quarter, a stark reversal for a company that has historically generated massive amounts of cash. The figure came in well below analyst expectations of near-breakeven results, signaling a sharp increase in spending to build out artificial intelligence infrastructure.

The shift marks the first time in 22 years that Alphabet has recorded negative free cash flow as a public company. In the previous quarter, the company also reported negative cash flow, creating a two-quarter stretch of cash burn that contrasts with its long-standing reputation as a cash generator. This financial turn is driven by aggressive efforts to boost cloud capacity and fund AI development.

Total revenue for the quarter reached $127.6 billion, falling short of the $128.2 billion estimated by analysts. Advertising revenue, a core part of the business, came in at $82 billion, missing expectations of $83.4 billion. Chief business officer Philipp Schindler attributed the slowdown in search advertising growth to the increased use of AI Mode, a chatbot interface for the search engine. The company is still experimenting with how to integrate ads into this new format and plans to roll out advertisements in AI Mode to international markets.

Despite the weakness in search, Google Cloud performance exceeded expectations. Revenue from the cloud division more than doubled to $30.71 billion in the third quarter ended September 30. Thomas Kurian, CEO of Google Cloud, joined the earnings call for the first time to discuss these results. He noted that sales of Google’s tensor processing units, which compete with Nvidia’s chips, have become a meaningful contributor to the business unit. Alphabet began recognizing revenue from direct sales of these TPU Systems last quarter.

Investors reacted negatively to the earnings, sending Alphabet shares down 10 percent after hours. The drop occurred despite the strong cloud numbers, as many market participants remain concerned about the high cost of the AI buildout and the risk to the dominant search franchise. Dave Wagner, portfolio manager at Aptus Capital Advisors, stated that investors need to see search accelerating rather than decelerating. He added that until search shows AI is additive to the business, the stock is likely to trade lower.

Chief financial officer Anat Ashkenazi told analysts that the company plans to increase capital expenditures for 2027 from this year’s forecast of $195 billion to $205 billion. She noted that the buildout of TPU inventory will place further pressure on free cash flow in the near term. Google Cloud’s backlog has grown to $561 billion, with the company expecting to recognize more than 55 percent of that amount as revenue in the next 24 months.

Net income available to common shareholders fell 25 percent to $26.17 billion. Adjusted earnings per share came in at $2.67, missing Wall Street targets of $3.02. Meanwhile, rival Microsoft, which also reported results on Wednesday, saw its shares rise more than 5 percent, driven by positive free cash flow that outstripped analyst estimates.