Alphabet’s Search Grip Faces an AI Revenue Test

Alphabet reported that Google search queries grew at their strongest pace in five years. Yet search revenue rose 12% to roughly $63 billion in the third quarter, missing estimates for the second quarter in a row. More searches didn’t bring in the revenue investors expected, raising a hard question about the company’s control of a major route people use to find information.

Alphabet’s earnings missed expectations overall. Its shares fell about 10% in extended trading after the report. Free cash flow came in at negative $9 billion, three times the estimated deficit. In the second quarter, free cash flow had turned negative for the first time in Alphabet’s history as a public company, at $5.9 billion.

Search revenue growth has slowed: 19% in the first quarter, 17% in the second and 12% in the third. Alphabet executives said foreign exchange was the biggest factor behind the deceleration and expected the currency impact to be greater in the fourth quarter. That’s the company’s explanation. Investors are also weighing whether AI tools could change how people find information and how Google earns from those interactions.

The fight over the starting point

Since ChatGPT’s early days, analysts have warned that AI could eclipse traditional search and that Google would need new ways to make money. Deepwater Asset Management’s Gene Munster told CNBC’s “Fast Money”: “These things are going to be a force.” If “personalized bots” take off, he said, “that will become for a lot of people the starting point of commerce, which impacts where Google is.”

UBS analysts wrote that the results were “going to bring Search cannibalization fears right back to the forefront.” Mizuho analyst Jordan Klein said the results heightened concern that “AI and agentic” products were taking share from Search and YouTube and hurting Alphabet’s AI monetization case. Gil Luria, an analyst at D.A. Davidson, wrote that investors would worry the misses in Search, YouTube and Subscription, which led to a profit miss, showed AI had finally come for Google. “We would not rush to conclusions based on one quarter, but will definitely need to reassess what the world of agentic commerce means for Google,” he wrote.

Selling AI back to the market

For much of the past year, Google has invested in AI infrastructure and services for consumers and businesses. Its Gemini model has helped it compete with Anthropic and OpenAI, while Gemini-powered enterprise services have attracted customers. Google says Gemini also strengthens its digital advertising business by helping it understand user intent and make ads more relevant.

Chief Business Officer Philipp Schindler said on the earnings call: “We continue to accelerate the deployment of Gemini models across our entire ads infrastructure to boost performance.” Google added AI features in what Schindler called its “biggest update to product listing ads in a decade” during the third quarter. “Overall, AI is accelerating our ads development and drives the majority of our product launches,” he said. In the quarter, Gemini models helped advertisers generate more than 1.5 billion campaign assets, more than sevenfold the figure a year earlier.

Infrastructure, contracts and cash

Google Cloud delivered stronger growth. Revenue more than doubled to nearly $31 billion as the business sought to catch up with Amazon Web Services and Microsoft Azure. Its backlog reached roughly $560 billion, reflecting contracted demand for AI infrastructure; management expected just over half of that backlog to be recognized over the next 24 months. Microsoft reported Azure revenue of $33.2 billion, up 48% year over year, in results released after the market closed Wednesday.

Alphabet kept its full-year 2026 capital expenditure forecast at $195 billion to $205 billion and said spending would rise significantly in 2027. Some of that money goes to tensor processing units, or TPUs, which compete with Nvidia graphics processing units. Alphabet began selling TPUs to outside customers in the second quarter. Google Cloud customer agreements enter the backlog before the company builds and delivers the systems and records the associated revenue.

CFO Anat Ashkenazi described the cash flow behind that process on the earnings call: “You see cash going out and we're building up the inventory base. As we start delivering and billing customers for these TPU systems, then you see cash coming in.” A separate Fortune report said Google Cloud revenue more than doubled to $30.7 billion in the third quarter, while Alphabet’s after-hours share price fell more than 11%, wiping out more than $280 billion in market value.