On October 28, Google parent Alphabet stunned the market with its third-quarter earnings report.
After the results were announced, the stock plunged more than 10% at one point, wiping out six months of gains.
First, the bright spot: Cloud was genuinely impressive (cloud was also a standout in Microsoft’s earnings report). Google Cloud revenue rose 103% year over year to $30.7 billion, far exceeding expectations; its operating margin surged to 36.2%, up from 23.7% a year earlier.
But outside of Cloud, all the other core businesses stumbled.
First, Search fell short of expectations.
Revenue from Search and related businesses was $63.35 billion, below the market’s forecast of $64.96 billion. YouTube ad growth also slipped below the psychologically important 10% threshold. This reflects a harsh reality: AI is cannibalizing traditional search clicks and ad traffic from within.
Second, free cash flow was negative for the second consecutive quarter.
Third-quarter free cash flow was negative $9.07 billion, far worse than the market expectation of negative $3.5 billion. Over the past 12 months, trailing free cash flow plunged 73% from $73.6 billion to $19.7 billion.
Capital expenditures soared to $51.36 billion, doubling year over year. Although slightly below expectations, the massive spending is severely draining cash flow.
Third, huge losses on equity investments weighed on profits. The equity investment portfolio generated a loss of $8.66 billion this quarter. In the previous quarter, it had generated a profit of $99 billion (mainly from equity stakes in SpaceX and Anthropic)—a stark reversal that directly caused EPS to fall well short of expectations.
However, Google remains an unshakable industry leader. This pullback can be seen as a shakeout: the more thoroughly weak hands are cleared out, the easier the rebound will be!
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