Alphabet Loses $500 Billion in Value After AI Search Hurts Google’s Ad Sales
Alphabet shares fell almost 13% after Google said its AI search summaries were bringing in less ad money. Amazon and Microsoft also faced tough questions from investors this week.
NEW YORK, Oct 30- Alphabet, the parent company of Google, lost about $500 billion in stock market value on Thursday after its latest quarterly results worried investors on Wall Street.
Alphabet’s shares fell nearly 13%, pushing the stock to a six-month low. The company’s total market value dropped to $3.46 trillion, from $3.97 trillion the day before. It was one of the biggest one-day losses in market value for any company in stock market history.
The main worry was Google Search. Alphabet said its artificial intelligence summaries, which now appear by default at the top of many search results, were cutting into the money it makes from ads.
Ads displayed alongside Google Search results account for most of Alphabet’s business. Revenue from search and related products rose 12% year over year to about $63 billion, but that fell short of analysts’ expectations and was slower than the 17% growth Alphabet reported in the previous quarter.
During a call with analysts on Wednesday, Alphabet’s chief business officer, Philipp Schindler, said searches using the company’s AI Mode currently generate less advertising revenue than traditional searches. He said Google is adding more ads to its AI search tools, including in markets outside the United States, and expressed confidence in the company’s direction. Investors, however, were not convinced.
At first glance, Alphabet’s results weren’t bad. Total revenue rose 25% from a year earlier, to $127.6 billion. Google Cloud did especially well, with revenue more than doubling to almost $31 billion.
But profit fell by 25% in the quarter. And for only the second time since it became a public company, Alphabet reported negative free cash flow, of about $9 billion. That’s close to twice the shortfall it reported just three months earlier.
Free cash flow is the money a company has left after paying for its operations and investments. A negative figure means Alphabet is now spending more than it brings in. Almost all of that extra spending is going into artificial intelligence.
Tracy Woo, a principal analyst at the research firm Forrester, said the results show how hard it is to fund huge spending on artificial intelligence while keeping older businesses strong.
Alphabet wasn’t the only tech giant to face doubts this week. Amazon and Microsoft also reported results, and both plan to keep spending vast sums in the race to lead in artificial intelligence. But investors are increasingly asking how that spending will affect each company’s ability to grow its main businesses.
Amazon’s shares fell 6% in after-hours trading on Thursday. The company reported that quarterly sales rose 11% to $201 billion; it also recorded negative free cash flow of $42 billion, meaning it is spending far more than it earns, with spending increasing sharply over just three months.
Amazon’s chief executive, Andy Jassy, said the company is investing heavily in part because it sees an opportunity to build not one, but two businesses that could each generate $1 trillion in the future.
Jassy did not specify which two businesses he meant. However, during a call with analysts, he repeatedly highlighted the opportunity for Amazon to make and sell its own computer chips. He also pointed to Bedrock, Amazon’s platform that provides paying customers with access to many major artificial intelligence models and tools.
Andy Jassy said Amazon has learned over more than 20 years that early leaders don’t always end up as the only option. “There is not one tool to rule the world,” Andy Jassy said.
Analysts pressed Andy Jassy several times on the spending. He admitted it would be easier if the costs could be spread out over the next 25 years, but said that isn’t how things work. He added that Amazon can pay for its plans, and that he believes they will change the size of the company for good.
Microsoft received a calmer reaction, with its shares falling by less than 1% on Thursday.
As one of OpenAI’s largest investors, Microsoft spent about $5 billion less on artificial intelligence projects this quarter. Earlier in the week, Microsoft also indicated its intentions to cut down thousands of employees, an initiative expected to lower costs further.
Microsoft’s revenue grew 19% from a year earlier, to $92.3 billion. Its cloud business, which is key to its growth, rose 30% to $63 billion.
Microsoft’s chief executive, Satya Nadella, said tasks automated through Copilot, Microsoft’s artificial intelligence assistant, have nearly doubled since July. Satya Nadella said daily Copilot users have grown by 500% from a year ago.
Lower spending and rising sales usually please investors. But Tracy Woo said Wall Street is now looking further ahead, trying to judge which companies will truly deliver on their big promises about artificial intelligence.
Tracy Woo said Microsoft’s results show that business demand for artificial intelligence remains strong. However, she added, the results also raise a much bigger question for the tech industry: where the real value of artificial intelligence will ultimately end up.
