Google's AI Search Summaries Hit Ad Revenue, Wiping $500bn From Alphabet's Value

By the close of trading on Thursday, Alphabet's total stock market value had dropped to $3.46 trillion, down from $3.97 trillion the day before. That is a loss of just over $500bn (£374bn) in a single session, and it followed the company's last business update of the year. Its shares fell almost 13%, hitting a six-month low and marking the second-worst showing of the year.

On the surface, the quarter was not a bad one. Alphabet's total revenue rose 25% from a year earlier to $127.6bn, helped by Google Cloud, where revenue grew 103% to almost $31bn. But profits fell by a considerable 25%. And for only the second time since it became a public company, Alphabet reported negative free cash flow, this time in excess of $9bn, almost twice the cash shortfall it showed three months ago. Free cash flow is what a company keeps after paying for operations and investments, so a negative figure means it is spending more than it brings in. Nearly all of that new spending goes to Google's AI investments.

What unsettled investors most was the effect on search. Google's search engine now defaults to AI-generated summaries of a person's query, and the company revealed that this cut into the number of ads it was able to sell during the quarter. Ads displayed alongside search results make up the vast majority of Alphabet's business. Tracy Woo, a principal analyst at Forrester, said the weak search results highlight the challenge of funding massive AI investments while keeping established businesses strong. Google's chief business officer, Philipp Schindler, had said on Wednesday that he felt very good about the company's trajectory with an AI-focused version of search.

Amazon and Microsoft also reported this week, and both, like Google, plan to keep spending enormous sums in the AI race. Amazon's shares fell 6% in after-hours trading. Its quarterly sales grew 11% to $201bn, but its free cash flow came in at negative $42bn, meaning its spending has risen six-fold in three months.

Chief executive Andy Jassy defended the outlay by saying Amazon has a chance at not one but two businesses that could each bring in $1 trillion in the future. He did not name them, though on a call with analysts he repeatedly pointed to the opportunity in Amazon designing and selling its own computer chips, and in Bedrock, its AI developer platform that gives paying users access to most major AI models and tools. Pressed several times to explain the spending, he conceded it would be more convenient if it were spread over the next 25 years, adding that this is not the world the company lives in. He said Amazon can fund the plan and that it will forever change the company's size, revenue and free cash flow. He also argued that over 20-plus years Amazon has learned there is not one tool to rule the world, and that whoever leads early is never the only one people use.

Microsoft got the gentlest reaction, with shares down less than 1%. The company, one of OpenAI's largest investors, spent around $5bn less on AI-related investments, and it announced earlier this week plans to cut thousands of workers, which will lower costs further. Revenue grew 19% to $92.3bn, and its cloud business grew 30% to $63bn. Chief executive Satya Nadella said Copilot, its AI chatbot and tool, has seen automated tasks nearly double since July, with daily users up 500% from a year ago.

Lower spending and rising sales would normally please investors. Woo said Wall Street is instead looking further ahead, trying to work out which companies will deliver on their AI promises. Microsoft's results, she said, show enterprise demand for AI remains strong, but raise a bigger question about where AI's value will ultimately be captured. The thing to watch is whether these companies' core businesses keep growing while the spending continues.