Alphabet misses Q3 revenue and earnings expectations as free cash flow turns negative

Alphabet reported third-quarter revenue of $127.58 billion and adjusted earnings per share of $2.67, both below analyst estimates. The company posted negative free cash flow of $9.07 billion, and its shares slumped more than 10% after the results. Revenue still grew 25% from a year earlier, but it was the company's first top-and-bottom-line miss in nearly four years.

Earnings and cash flow

Net income fell to $26.17 billion, or $2.12 per share, from $34.98 billion, or $2.87 per share, a year ago. Operating income totaled $40.58 billion, missing a $43.19 billion forecast from FactSet. Free cash flow came in at negative $9.07 billion, compared with the $2.70 billion expected by analysts. Capital expenditures were $51.36 billion, below the $55.09 billion expected. Long-term debt climbed to $125.1 billion from $21.6 billion a year earlier, an increase of about 479%.

AI spending and outlook

Alphabet maintained its full-year capital expenditures forecast after lifting guidance during the second quarter to between $195 billion and $205 billion from $190 billion. Annual capital expenditures are expected to top $200 billion before exceeding $300 billion in 2027. Finance chief Anat Ashkenazi said the company continues to expect capital expenditures to increase significantly in 2027 and will provide further details on the fourth-quarter call. The company also recorded a loss of $8.66 billion from equity holdings in the third quarter, after a $99.03 billion windfall from such holdings in the second quarter fueled by stakes in SpaceX and Anthropic.

Cloud, Gemini and search

Google Cloud revenue more than doubled to $30.7 billion, surpassing the $28.7 billion expected by analysts. Google Cloud CEO Thomas Kurian said in his first public earnings call remarks that the company is seeing extraordinary demand and strong growth from both AI labs, capital markets, financial service institutions, and enterprises. The company said it has continued taking market share from Amazon Web Services and Microsoft Azure. Google said its Gemini app reached 1 billion users, making it the fastest-growing product in its history. CEO Sundar Pichai said the company is already seeing strong demand for its recently launched Argon Gemini model, and that its Carbon iteration announced on Wednesday outperforms Argon on almost every domain. Search revenue grew 12% to $63.35 billion, short of a $64.96 billion estimate, and Pichai said AI investments powered the highest query growth rate over the last five years. Jefferies analyst Brent Thill said the cloud business was the only business that beat at 103% growth, that it did not beat by much, and that everything else missed.

Sources: CNBC