Google parent company Alphabet has hit a six-month stock low, losing $500bn in value after spooking investors with its last business operations update on Thursday 29th.
This came after revealing that the AI summaries were massively impacting ad revenue. The automatic AI summaries in Search are cutting into ad sales, and free cash flow turned negative.
This follows Microsoft and Amazon's investor reports planning to keep spending huge amounts in the AI race.
Investors do not seem to be convinced by their plans. We reported earlier this year that Microsoft, Alphabet, Amazon, Meta and Oracle are already collectively on track to outspend their free cash flow by 2027 as investment in AI infrastructure continues to accelerate.
Google Spends More Than It Brings In
Alphabet's initial report looked positive: total revenue grew 25% on last year to $127.6bn, according to the BBC. Revenue is all the money coming in from sales.
This was largely due to Google Cloud, which sells computing services to other businesses, that grew 103% to almost $31bn.
However, total profit fell 25% over the quarter. Profit is what’s left of that revenue after costs.
Free cash flow also turned negative, by more than $9bn. Free cash flow is the money a company has left after paying for its operations and investments. This negative figure means that Alphabet spent more than it brought in. It is only the second time that has happened since Alphabet became a public company, and the loss is almost double the one reported three months ago.
Google AI Overviews Killing Core Business Sales
Google Search now shows AI Overviews by default. AI Overviews is a Google Search feature that uses its Gemini AI model to give a short summary of key information on a topic or question. This appears on top of the search results and often answers a users search query without them having to navigate to a new website.
The BBC says AI Overviews reduced the number of ads Google was able to sell in the quarter. Search ads make up the vast majority of Alphabet’s business.
Philipp Schindler, Google’s chief business officer, said on Wednesday that he felt “very good about our trajectory” with an AI-focused version of Search.
Tracy Woo, principal analyst at Forrester, said the results show how hard it is to fund huge AI investment while keeping established businesses strong.
Investors Worry As Amazon And Microsoft Keep Spending On AI
Amazon’s free cash flow was negative $42bn, the BBC reports. Sales grew 11% to $201bn, but shares fell 6% in after-hours trading on Thursday.
CEO Andy Jassy claimed the company has a chance at two businesses that could bring in $1tn. He did not say which.
Microsoft got a milder reaction. Revenue grew 19% to $92.3bn and shares fell by less than 1%. It spent around $5bn less on AI investments, and announced plans this week to cut thousands of jobs.
Tech shares fell further on Friday, Reuters reports, as investors worried that huge AI spending may not deliver enough returns. Amazon dropped 7% in out-of-hours trading, and Nasdaq 100 futures pointed to a fall of more than 2%.
Reuters says investors are also concerned that price rises could squeeze demand for devices like smartphones and PCs. Jason Da Silva of Arbuthnot Latham said the next test will be Anthropic’s IPO, and that a poor listing could signal weakness.
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