Google's parent company Alphabet lost just over $500 billion in market value on Thursday after its latest earnings update rattled Wall Street, capping a week in which the three biggest spenders in the AI race — Alphabet, Amazon and Microsoft — all confirmed they intend to keep pouring astronomical sums of cash into artificial intelligence even as investors grow uneasy about what it is doing to their core businesses.
At first glance, Alphabet's numbers were not bad at all: total revenue grew 25% year-on-year to $127.6bn, driven in part by Google Cloud revenue more than doubling to almost $31bn. But profit fell by a considerable 25% over the quarter, and the company posted negative free cash flow in excess of $9bn — nearly double the shortfall it reported just three months earlier — meaning Alphabet is now spending more money than it brings in. Almost all of that spending is tied to AI.
Search's AI Problem
The culprit, analysts said, is Google's own search engine, which now defaults to AI-generated summaries of a user's query — reducing the number of ads the company is able to sell alongside results, historically the vast majority of Alphabet's business. Tracy Woo, a principal analyst at Forrester, said the results "highlight the challenge of funding massive AI investments while maintaining the strength of established businesses." Google's chief business officer, Phillip Schindler, said he felt "very good about our trajectory," but the stock still fell nearly 13% on Thursday, its second-worst single-day showing of the year, closing out trading with Alphabet's total market value down to $3.46 trillion from $3.97 trillion the day before.
Amazon fared little better. Shares fell 6% in after-hours trading despite sales growth of 11% to $201bn, after the company disclosed negative cash flow of $42bn — a sixfold jump in three months. Chief executive Andy Jassy argued the company was betting on "not one, but two" businesses that could eventually be worth $1 trillion each, pointing repeatedly to Amazon's custom AI chips and its Bedrock developer platform without specifying which two businesses he meant. "One of the lessons we've learned over 20-plus years is that there is not one tool to rule the world," Jassy told analysts. "People always assume whatever is in the lead early on will be the only thing that people use — it's never true."
Microsoft's Smaller Stumble
Wall Street reacted more mildly to Microsoft, whose shares fell less than 1%. The company, one of OpenAI's largest investors, actually trimmed its AI-related spending by roughly $5bn this quarter and confirmed plans, announced earlier in the week, to cut thousands of jobs. Revenue still grew 19% year-on-year to $92.3bn, with its cloud business up 30% to $63bn. Chief executive Satya Nadella pointed to growing enterprise use of the company's Copilot AI assistant as evidence the spending is beginning to pay off, even as rivals' results suggest the industry's appetite for capital still outpaces its ability to turn AI into profit.
