The key facts

  • Alphabet shares fell 13%, market capitalization shrank by $500 billion
  • Free cash flow came in at nearly minus $9.1 billion, capex rose to $51.3 billion
  • Search advertising revenue ($63.4 billion) missed the $64.9 billion forecast

Record drop after earnings report

Shares of Alphabet, Google's parent company, plunged 13%, and the holding's market capitalization fell by a record $500 billion. This was reported by the Financial Times, whose data is cited by Gazeta.Ru. The trigger was the publication of third-quarter financial reports, which turned out worse than analysts had expected.

What the reports showed

The holding's free cash flow came in at nearly minus $9.1 billion, while capital expenditures rose to $51.3 billion, up from $44.9 billion in the second quarter. The increase in spending is largely tied to major investments in artificial intelligence development. Analysts also noted weakness in Google's core search advertising business: revenue from the largest division grew 12% year over year to $63.4 billion, falling short of the $64.9 billion forecast and slowing compared with the beginning of the year.

AI is undermining traditional search

Google's chief business officer Philipp Schindler acknowledged that queries in 'AI mode,' which deliver conversational text answers instead of a list of links, are undermining traditional search and leading to 'reduced monetization' through advertising. This explains the paradox in the earnings report: the company is increasing AI spending, yet it is precisely AI modes that, according to the executive himself, are reducing search advertising revenue — the main source of income.

Context: problems in China too

Alphabet's decline coincided with a correction in the Chinese market: On October 27, Reuters reportedthat an index of the 50 largest Chinese companies linked to artificial intelligence had crashed by 40%. These companies lost $480 billion in market capitalization after nearly two years of continuous stock growth, while China's main stock index, the CSI300, fell 20% compared with June. Thus, pressure on AI company shares is being seen on both sides of the market, although the causes differ in each case: for Alphabet, it was weak earnings; in China, a collapse of the entire sector.