Alphabet’s AI-Driven Pivot Faces Search Revenue Headwinds

Alphabet reported third-quarter results that missed analyst expectations, triggering a roughly 10 percent drop in after-hours trading. Revenue in the “search and other” segment reached about $63 billion, up 12 percent year-over-year but below forecasts for the second straight quarter. Google Cloud’s revenue more than doubled to nearly $31 billion, and its backlog grew to roughly $560 billion, reflecting strong demand for AI-focused infrastructure. Free cash flow turned negative $9 billion for the quarter, three times the estimated deficit.

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Since the rise of ChatGPT, analysts have warned that AI-driven bots could erode traditional search revenue. Alphabet has responded by investing heavily in its Gemini large-language model, expanding AI capabilities across ads, and launching its own tensor processing units (TPUs) for external customers. The company’s free cash flow first went negative in the second quarter of 2025 as it poured capital into AI infrastructure and services.

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• Search-segment revenue: ? $63 billion, +12 % YoY (below estimates).

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• Google Cloud revenue: ? $31 billion, > 100 % YoY increase.

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• Cloud backlog: ? $560 billion, with > 50 % expected to be recognized within 24 months.

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• Free cash flow: -$9 billion (quarter).

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Chief Business Officer Philipp Schindler said the company is accelerating Gemini deployment across its ads infrastructure to boost performance and that advertisers are rapidly adopting AI tools, with Gemini models generating more than 1.5 billion campaign assets in the quarter—a sevenfold increase from a year earlier.

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Chief Financial Officer Anat Ashkenazi explained that cash outflows reflect the build-up of inventory for TPU systems, which will generate cash as the company begins billing customers.

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Alphabet executives attributed the deceleration in search revenue primarily to foreign-exchange effects, indicating that currency impacts will be larger in the fourth quarter.

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• “We continue to accelerate the deployment of Gemini models across our entire ads infrastructure to boost performance,” — Philipp Schindler

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• “You see cash going out and we’re building up the inventory base,” — Anat Ashkenazi

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The earnings miss underscores a growing tension between Alphabet’s AI-driven growth in cloud services and the slowing revenue trajectory of its core search business. The stock reaction reflects investor uncertainty about whether AI will ultimately offset the erosion of traditional search monetization.

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Alphabet expects to recognize just over half of its $560 billion cloud backlog within the next 24 months. The company has maintained its full-year 2026 capital-expenditure forecast of $195 billion–$205 billion and signaled “significantly higher” spending in 2027, much of which will support TPU production and further AI infrastructure expansion.

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