Google Reports Third-Quarter Results, Missing Both Revenue and Earnings Expectations for the First Time in Four Years as Shares Plunge More Than 10% After Hours!

After the market closed on October 28, Alphabet delivered an earnings report with sharply contrasting results across its businesses. Revenue reached $127.58 billion, up 25% year on year, marking its fastest growth since 2021, but falling short of the $128.22 billion expected by the market. Adjusted earnings per share came in at $2.67, versus expectations of $3.02. Net income declined from $34.98 billion a year earlier to $26.17 billion. This was the first time in nearly four years that Alphabet missed both revenue and earnings expectations. Its shares fell more than 10% at one point in after-hours trading, erasing more than six months of gains and retreating to levels last seen around April this year.

Search Advertising Growth Slows for Three Consecutive Quarters as AI Monetization Remains Weak

Revenue from Google Search and related businesses reached $63.35 billion, up 12% year on year, below market expectations of $64.96 billion and the roughly 14% growth anticipated by buy-side investors. Total advertising revenue came in at $82.01 billion, below expectations of $83.57 billion. YouTube advertising revenue reached $11.12 billion, up 9.2% year on year, falling below the psychological 10% threshold. The growth trajectory deserves more attention than a single quarter’s figures. Search advertising revenue growth was 19% in the first quarter, slowed to 17% in the second quarter, and slipped further to 12% in the third quarter, marking three consecutive quarters of slowing growth, with the pace of deceleration increasing.

On the earnings call, Pichai emphasized that AI had driven search query growth to its highest rate in five years, that the Gemini 4 Argon and Carbon models were at the forefront of the industry, and that first-party model APIs were processing nearly 32 billion tokens per minute, up more than fourfold year on year. Query volumes are rising—that is a fact. But advertising revenue growth is slowing—that is also a fact. The gap between the two points to a structural problem: AI-generated search experiences have yet to match traditional search advertising in monetization efficiency. Growth in query volumes has not translated proportionally into advertising inventory and clicks. An Evercore ISI survey in September offered a relatively optimistic assessment: 78% of respondents still used Google as their primary search tool, while 60% said they searched more frequently after adopting AI. But the survey reflects user behavior, while the earnings report reflects revenue conversion. Users are searching on Google, but advertisers are not increasing their spending at the same pace.

The Only Bright Spot: Cloud

Google Cloud revenue reached $30.71 billion, up 103% year on year, significantly exceeding market expectations of $29.1 billion. Cloud operating income came in at $11.1 billion, versus expectations of $9.8 billion, while its operating margin jumped from 23.7% a year earlier to 36.2%. Google Cloud continues to take market share from AWS and Azure, with AI infrastructure and TPU system sales serving as the main drivers. Making his first appearance on an earnings call, Google Cloud CEO Thomas Kurian explicitly described demand from AI labs, capital markets, financial services, and enterprise customers as “extraordinary and strong.”

However, the cloud business’s size and growth are insufficient to offset weakness in the other two businesses. At $82.01 billion, advertising revenue is nearly three times the size of cloud revenue. Each percentage point of slower advertising growth weighs on total revenue far more than an additional percentage point of cloud growth contributes. Cloud’s 103% growth is real, but within a company whose foundation remains advertising, it cannot yet provide an effective offset. Jefferies analyst Brent Thill offered a direct assessment: cloud was the only business to exceed expectations. With the qualifier “only,” that 103% growth instead becomes a point of contrast, highlighting how far the other businesses fell short of expectations.

Cash Flow Pressure Is Becoming Increasingly Apparent

Third-quarter free cash flow was negative $9.07 billion, compared with analysts’ expectations of negative $2.7 billion, making the actual shortfall more than three times the forecast. The previous quarter had already recorded negative free cash flow of $5.9 billion, marking the first time in Alphabet’s 22 years as a public company that free cash flow was negative for two consecutive quarters. Trailing twelve-month free cash flow plunged from $73.6 billion a year earlier to $19.7 billion, a decline of 73%.

Breaking down the figures, capital expenditure reached $51.36 billion, up 114% year on year, but below market expectations of $55.09 billion to $55.78 billion. Viewed in isolation, capital expenditure coming in “below expectations” might appear reassuring. But the real driver of deteriorating cash flow was not higher-than-expected capital expenditure; it was the decline in operating cash flow. Quarterly operating cash flow fell from $48.4 billion a year earlier to $42.3 billion, down 13% year on year and well below market expectations of $53.9 billion. The simultaneous contraction in operating cash flow and doubling of capital expenditure produced the $9.07 billion shortfall.

Changes in financing further underscore the cash flow pressure. Long-term debt climbed from $21.6 billion a year earlier to $125.1 billion, an increase of approximately 479%. When operating cash flow could no longer cover capital expenditure, the company began using debt to fill the gap. This is more than a quarterly fluctuation; it represents a shift in its financing structure.

2027 Guidance Points to Even More Spending Ahead

On the earnings call, management provided information more consequential than the current quarter’s capital expenditure. CFO Anat Ashkenazi explicitly stated: “We continue to expect capital expenditure to increase significantly in 2027 and will provide more details on our fourth-quarter earnings call.” Full-year 2026 capital expenditure guidance remained unchanged at $195 billion to $205 billion, while spending in 2027 is expected to exceed $300 billion, with buy-side estimates generally ranging from $330 billion to $375 billion.

Capital expenditure came in below expectations for the quarter, but the outlook points to a larger figure ahead. The market is not pricing in “$5 billion less spent this quarter,” but rather “more spending every quarter ahead, with no visible timetable for free cash flow to turn positive.” Alphabet, Microsoft, Amazon, and Meta—the four hyperscalers—are expected to invest more than $700 billion combined in AI infrastructure in 2026, with an even higher figure in 2027. In this capital expenditure race, “spending less” is a relative concept; the absolute scale continues to expand at an accelerating pace.

A non-operating factor also contributed to the sharp decline in net income. Equity investments recorded a quarterly loss of $8.66 billion, reducing earnings per share by approximately $0.55. The losses mainly reflected changes in the fair value of holdings in companies including SpaceX and Anthropic.

This item is highly volatile and unrelated to the operating quality of the core business. In the second quarter, the same item contributed $99 billion in investment gains, pushing quarterly net income significantly above expectations. In the third quarter, it swung in the opposite direction, generating an $8.66 billion loss. Adjusted earnings per share excluding the impact of equity investments were $2.67, still below expectations of $3.02. The portfolio’s pendulum effect amplified fluctuations in reported earnings, but it explains neither the slowdown in advertising growth nor the deterioration in cash flow. The operating trends are what truly require scrutiny.

The Comparison With Microsoft Reveals What the Market Cares About

Microsoft’s Azure revenue grew 48%, accelerating from 43% in the previous quarter. Capital expenditure totaled $39.37 billion, below analysts’ expectations of $45.93 billion. Free cash flow was approximately $18.63 billion, down 27% year on year but still positive. Its shares rose nearly 3% after hours.

Google Cloud grew 103%, more than twice Azure’s rate. But free cash flow was negative $9.07 billion, and the capital expenditure outlook points to more than $300 billion in 2027. Its shares fell 10% after hours.

The market’s priorities in October 2026 are clear: the absolute rate of cloud growth matters, but cash flow sustainability and control over capital expenditure carry greater weight. Microsoft’s Azure growth was lower, but the combination of “below-expected capital expenditure + positive free cash flow” gave the market a view of an investment cycle with discernible limits. Google’s cloud growth was higher, but the combination of “negative free cash flow + another significant increase in spending in 2027” left the market facing an investment cycle with unclear limits. With both companies spending hundreds of billions of dollars on capital expenditure, investors are choosing not based on “who grows faster,” but on “who gets free cash flow back into positive territory first.”

The central tension in Alphabet’s earnings report is not whether any single business performed well or poorly. Cloud’s 103% growth is real, and so is the increase in search query volumes. The problem is that the bill for AI investment is expanding at a visible pace, while the realization of AI returns has failed to keep up. Three consecutive quarters of slowing search advertising growth indicate that AI’s benefits to the core monetization engine have yet to fully materialize. Two consecutive quarters of negative free cash flow indicate that capital expenditure has exceeded what operating cash flow can naturally cover. Guidance for a “significant increase” in 2027 indicates that management believes it must continue raising its investment.

Pichai said the company had “returned to the forefront of AI technology.” Its position at the technological frontier is clear. But what the market now wants is a timetable for free cash flow to turn positive. This earnings report provided no such timetable, and the 10% after-hours decline reflects the market’s pricing of that absence. If, on next quarter’s earnings call, management can still offer only “a significant increase in 2027” without any concrete reference point for the path to returns, the market will once again price its dwindling patience in the same way.