Alphabet shares GOOGL fell 8% in after-hours trading on Wednesday after the company reported lower-than-expected third-quarter earnings and a sharp increase in cash spending, despite strong growth at Google Cloud.
The company posted net income of $26.2 billion for the September quarter, down from $34.9 billion a year earlier and below Wall Street's estimate of $37.2 billion, according to FactSet data.
Earnings per share came in at $2.12, compared with analysts' forecast of $3.02.
Revenue increased 25% year over year to $127.6 billion, narrowly missing the $128.2 billion expected by analysts.
Earnings miss as spending pressures cash flow
Alphabet's results highlighted the financial pressure associated with its expanding investment in artificial intelligence and cloud infrastructure.
The company reported negative free cash flow of $9.07 billion for the quarter, compared with analysts' expectation of a cash outflow of just $36 million, according to data compiled by LSEG.
Capital expenditure reached $51.4 billion, an increase of 114% from the same period a year earlier.
Such spending includes investments in assets, including AI hardware, intended to support the company's operations and future growth.
Alphabet expects full-year infrastructure spending in 2026 to range between $195 billion and $205 billion, underscoring the scale of its investment programme.
Alphabet, Amazon (AMZN), Microsoft (MSFT) and Meta (META) are projected to spend well over $700 billion collectively in 2026 to expand their AI data centres, chips and high-performance networking capacity.
Google Cloud revenue more than doubles
Google Cloud provided a bright spot in the results, with quarterly revenue more than doubling as demand for AI infrastructure and related services remained strong.
The division generated $30.71 billion in revenue, exceeding analysts' average estimate of $29.57 billion, according to LSEG data.
FactSet estimates cited in the earnings report put expectations at $28.8 billion.
Google Cloud revenue grew 103% year over year, supported by enterprise AI infrastructure, AI solutions and core cloud services.
Alphabet said its custom-chip business was a “meaningful contributor to revenue growth.”
The cloud division has continued to secure enterprise commitments through multi-year cloud and AI infrastructure deals across sectors including cybersecurity, retail and financial services.
Alphabet is the world's third-largest cloud services provider, behind Amazon Web Services and Microsoft's Azure.
Strong demand for cloud-based AI training and inference has kept data centre utilisation high, encouraging major providers to expand capacity.
AI investments support growth but raise spending concerns
Alphabet's investments in proprietary tensor processing units, alongside third-party graphics processing units, have helped expand its ability to deliver cloud services despite industry-wide constraints on advanced chips and data-centre power.
The company also benefited from wider adoption of its Gemini model suite across enterprise software and developer platforms during the quarter.
Its integration with Apple (AAPL)'s ecosystem to support cloud-based AI capabilities has further extended its reach.
The strong performance at Google Cloud suggests Alphabet is positioned to benefit from continued enterprise spending on AI, while its infrastructure investments could help it capture market share as businesses move workloads to the cloud.
However, the earnings shortfall and unexpectedly high cash burn may keep investors focused on whether revenue growth can justify the cost of expanding computing capacity.
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