Why Did Google Shares Plunge More Than 10% After Hours? Third-Quarter Results Miss Both Revenue and Earnings Expectations for the First Time in Four Years!

Alphabet’s shares dropped more than 10% at one stage in after-hours trading following its earnings release after the market closed on 28 October. The fall wiped out more than six months of gains, taking the stock back to levels last seen around April this year. Behind the sell-off was a sharply uneven performance across the group: revenue rose 25% year on year to $127.58 billion, its strongest growth since 2021, yet missed the market forecast of $128.22 billion. Adjusted earnings per share of $2.67 also undershot expectations of $3.02, while net income fell to $26.17 billion from $34.98 billion a year earlier. For the first time in nearly four years, Alphabet fell short of both revenue and earnings forecasts.

Why Has Search Advertising Growth Slowed for Three Consecutive Quarters Despite AI?

The concern in search advertising extends beyond a single quarterly miss to the direction of growth. From 19% in the first quarter, revenue growth eased to 17% in the second and then to 12% in the third. That represents three consecutive quarters of slowing growth, with the deceleration becoming more pronounced. Google Search and related businesses generated $63.35 billion in revenue, a 12% year-on-year increase that fell short of the market’s $64.96 billion forecast and the roughly 14% growth buy-side investors had anticipated. Advertising revenue overall stood at $82.01 billion against expectations of $83.57 billion. At YouTube, advertising revenue rose 9.2% year on year to $11.12 billion, slipping below the psychological 10% growth threshold.

During the earnings call, Pichai highlighted the fastest search query growth in five years, attributing it to AI. He also placed the Gemini 4 Argon and Carbon models at the industry’s forefront and said first-party model APIs were handling nearly 32 billion tokens per minute, more than four times the year-earlier level. Yet rising query volumes and slowing advertising revenue growth are both realities. Their divergence suggests a structural issue: AI-generated search experiences still do not monetise as efficiently as traditional search advertising. Additional queries have not produced a proportionate increase in advertising inventory and clicks. A September survey by Evercore ISI presented a relatively encouraging picture, with 78% of respondents continuing to use Google as their main search tool and 60% reporting more frequent searches after adopting AI. However, user behaviour is what the survey captures; conversion into revenue is what the earnings report measures. Google users are searching more, but advertisers’ spending is not keeping pace.

Why Was Cloud the Only Bright Spot?

A 103% year-on-year surge took Google Cloud revenue to $30.71 billion, comfortably ahead of the market’s $29.1 billion estimate. Operating income for the business reached $11.1 billion, exceeding the $9.8 billion forecast, as its operating margin expanded to 36.2% from 23.7% a year earlier. Led by AI infrastructure and TPU system sales, Google Cloud continues to gain market share from AWS and Azure. On his first earnings-call appearance, Google Cloud CEO Thomas Kurian characterised demand from AI labs, capital markets, financial services and enterprise customers as “extraordinary and strong.”

Even so, cloud lacks the scale and growth needed to compensate for weakness in the other two businesses. Advertising revenue of $82.01 billion is almost three times cloud revenue. A one-percentage-point slowdown in advertising growth therefore has a much larger effect on total revenue than a one-percentage-point acceleration in cloud growth. The 103% expansion in cloud is genuine, but it cannot yet adequately counter weakness in a group still built around advertising. Jefferies analyst Brent Thill put it plainly: cloud alone beat expectations. The word “only,” in that assessment turns the 103% growth figure into a contrast with the substantial shortfalls elsewhere.

How Severe Is the Pressure on Cash Flow?

Negative free cash flow of $9.07 billion in the third quarter was more than three times the negative $2.7 billion analysts had projected. It followed negative free cash flow of $5.9 billion in the preceding quarter. Alphabet has now reported two consecutive quarters of negative free cash flow for the first time in its 22 years as a listed company. Over the trailing twelve months, free cash flow dropped 73%, falling to $19.7 billion from $73.6 billion a year earlier.

The detail shows why lower-than-forecast capital expenditure offered little comfort. Spending rose 114% year on year to $51.36 billion, but remained below the market’s expected range of $55.09 billion to $55.78 billion. Taken on its own, expenditure coming in “below expectations” could look reassuring. The deterioration in cash flow, however, stemmed not from capital expenditure exceeding forecasts but from a fall in operating cash flow. At $42.3 billion, quarterly operating cash flow was down 13% year on year from $48.4 billion and substantially below the $53.9 billion market estimate. Falling operating cash flow, alongside a doubling of capital expenditure, resulted in the $9.07 billion shortfall.

The funding mix provides further evidence of the strain. Long-term debt increased by approximately 479%, reaching $125.1 billion compared with $21.6 billion a year earlier. Debt began filling the funding gap once operating cash flow was no longer sufficient to meet capital expenditure. Rather than merely a quarterly variation, this marks a change in the company’s financing structure.

How Much More Spending Does the 2027 Guidance Imply?

Management’s comments on future spending carried greater significance than the quarter’s capital expenditure figure. Speaking on the earnings call, CFO Anat Ashkenazi stated explicitly: “We continue to expect capital expenditure to increase significantly in 2027 and will provide more details on our fourth-quarter earnings call.” The full-year 2026 capital expenditure forecast was held at $195 billion to $205 billion. For 2027, however, expenditure is expected to surpass $300 billion, while buy-side estimates generally sit between $330 billion and $375 billion.

A quarterly undershoot in capital expenditure does not change the prospect of substantially higher spending ahead. Investors are pricing not “$5 billion less spent this quarter,” but “more spending every quarter ahead, with no visible timetable for free cash flow to turn positive.” Together, the four hyperscalers, Alphabet, Microsoft, Amazon and Meta, are expected to put more than $700 billion into AI infrastructure in 2026, followed by an even larger sum in 2027. Against that backdrop, “spending less” describes only a relative position in the capital expenditure race. In absolute terms, the scale of spending is still growing at an accelerating rate.

Part of the steep fall in net income also came from outside operations. A quarterly equity investment loss of $8.66 billion lowered earnings per share by approximately $0.55. Changes in the fair value of stakes in companies including SpaceX and Anthropic accounted for most of those losses.

Such investment effects are highly volatile and say little about the operating quality of the core business. In the second quarter, this same item generated investment gains of $99 billion, lifting quarterly net income well beyond expectations. The direction reversed in the third quarter, producing a loss of $8.66 billion. Even after removing the equity investment impact, adjusted earnings per share were $2.67, below the $3.02 forecast. Although swings in the portfolio magnified changes in reported earnings, they do not account for either weaker advertising growth or deteriorating cash flow. Those underlying operating trends deserve the closest attention.

What Does the Microsoft Comparison Say About Market Priorities?

Microsoft shares gained nearly 3% in after-hours trading as Azure revenue growth accelerated to 48% from 43% in the preceding quarter. Capital expenditure of $39.37 billion was below analysts’ $45.93 billion estimate. Free cash flow declined 27% year on year to approximately $18.63 billion, but remained positive.

By contrast, a 103% increase in Google Cloud, more than double Azure’s growth rate, accompanied a 10% after-hours fall in Alphabet shares. Free cash flow stood at negative $9.07 billion, with the capital expenditure outlook indicating spending above $300 billion in 2027.

That contrast makes the market’s October 2026 priorities evident. The absolute pace of cloud expansion counts, but sustainable cash flow and capital expenditure discipline count more. Despite slower Azure growth, Microsoft offered “below-expected capital expenditure + positive free cash flow”, giving investors a sense that its investment cycle had identifiable limits. Google combined faster cloud growth with “negative free cash flow + another significant increase in spending in 2027”, presenting an investment cycle whose limits remained unclear. Both companies are committing hundreds of billions of dollars to capital expenditure. Investors’ choice is therefore less about “who grows faster,” and more about “who gets free cash flow back into positive territory first.”

At the heart of Alphabet’s results is a mismatch, rather than the performance of any one business. Neither the 103% increase in cloud revenue nor the rise in search queries is in question. What matters is that AI investment costs are visibly expanding while the returns from AI have not kept pace. The three-quarter slowdown in search advertising growth suggests that AI has yet to deliver its full benefits to the core monetisation engine. Negative free cash flow across two consecutive quarters shows that capital expenditure has outgrown the funding naturally available from operating cash flow. Meanwhile, the forecast for a “significant increase” in 2027 signals management’s view that investment must keep rising.

According to Pichai, the company had “returned to the forefront of AI technology.” Its standing at the technological frontier is evident; the market’s demand now is for a timeline showing when free cash flow will become positive. No such timeline appeared in these results, and the 10% after-hours fall reflects how investors priced that omission. Should management again offer only “a significant increase in 2027” on next quarter’s earnings call, without a concrete reference point for the route to returns, the market will once more express its diminishing patience through the same pricing response.