Alphabet faces record drop as AI spending strains cash flow

Technology investors are closely monitoring how large tech companies balance massive artificial intelligence investments against the cash those projects actually generate. On Thursday, this tension drove a sharp split in stock performance between two of the sector's leaders. Alphabet shares fell 10% in premarket trading, while Microsoft stock climbed nearly 4%.

If the decline holds until the market closes, Alphabet will record its steepest drop following an earnings release since its initial public offering in 2004. The threshold for this record is a closing price more than 9.77% lower than the previous day.

Microsoft reported third-quarter capital expenditures and finance leases of $45.2 billion. This figure was 30% higher than the same period last year but came in below the $50.67 billion projected by analysts. The company's free cash flow decreased by 27% to $18.63 billion, though it remained positive.

Alphabet reported a starkly different financial picture. The parent company of Google posted negative free cash flow of $9.07 billion for the quarter. This result missed analyst expectations of a negative $2.70 billion by a wide margin. The company kept its full-year capital expenditure guidance in the range of $195 billion to $205 billion.

Search advertising, Alphabet's primary revenue source, grew 12% to $63.35 billion in the September quarter. Despite this growth, the number fell short of analyst forecasts, adding pressure to the stock. Philipp Schindler, the company's chief business officer, attributed part of the miss to lower monetization within the company's AI Mode.

Schindler stated that Alphabet is now scaling ads within its AI Overviews and AI Mode products, including in international markets. Ben Barringer, global head of technology research at Quilter Cheviot, noted that Microsoft is building its architecture in a measured way with fewer surprises. He described Alphabet's results as messy and the earnings call as poorly handled.

Barringer argued that Google faces an innovator's dilemma, unsure whether to protect its core business or join the disruption. He said Google has lost its edge with its Gemini chatbot and lags behind peers on agentic AI. Nasdaq-100 futures were down more than 1% early Thursday as the market digested the reports.