Tech Earnings Split: Alphabet Slides as AI Spending Concerns Mount

Investors turned their attention to the cost of artificial intelligence on Thursday, causing a sharp divergence in the stock performance of two of the largest technology companies. Alphabet shares fell 10% in premarket trading, heading toward the steepest post-earnings decline in the company's history since its 2004 initial public offering. In contrast, Microsoft shares climbed nearly 4% as traders digested its third-quarter financial results.

The primary driver of Alphabet's slide was a report of negative free cash flow for the third quarter. The Google parent company recorded a cash deficit of $9.07 billion, a figure that fell well short of the $2.70 billion in negative cash flow projected by analysts. Despite this dip in liquidity, Alphabet maintained its full-year capital expenditure guidance, keeping the range between $195 billion and $205 billion.

Microsoft presented a different financial picture with its own third-quarter release. The company reported capital expenditures and finance leases totaling $45.2 billion. This amount represented a 30% year-over-year increase but came in below the $50.67 billion that analysts had forecast. Microsoft's free cash flow declined by 27% to $18.63 billion, though the company remained in positive cash flow territory.

Revenue metrics for Alphabet also failed to meet market expectations. Search advertising, the company's largest revenue source, grew 12% to $63.35 billion in the September quarter. However, this growth rate missed analyst targets, adding pressure to the share price. Philipp Schindler, Alphabet's chief business officer, attributed part of the impact to lower monetization within the company's AI Mode. He stated that the company is now scaling ads within AI Overviews and AI Mode products, including in international markets.

Market analysts pointed to strategic differences in how the two firms are managing their AI investments. Ben Barringer, global head of technology research at Quilter Cheviot, noted that Microsoft is building its architecture in a measured way, resulting in fewer surprises. He described Alphabet's results as messy and criticized the handling of the earnings call. Barringer argued that Google faces an innovator's dilemma, struggling to balance the protection of its core search business with the need to join the disruption. He added that Google has lost its edge with Gemini and is behind peers on agentic AI.

The earnings reports come as investors scrutinize the return on massive AI spending across the tech sector. Google's search business faces headwinds from competitors like OpenAI's ChatGPT and Anthropic's Claude, which may be diverting user queries away from traditional search engines. Nasdaq-100 futures fell more than 1% early Thursday, reflecting a broader market caution regarding these spending plans.