Alphabet erased $500 billion as investors challenge AI spending

By Nathan Brooks

Alphabet lost just over $500 billion (£374 billion) in market value on Thursday after its final business update of the year unsettled Wall Street. Google’s shares hit a six-month low as investors weighed the cost of artificial intelligence against weakening economics in search.

Microsoft and Amazon also updated investors this week, and both joined Google in planning continued, extraordinary AI spending. Investors focused on what those plans mean for each company’s ability to keep growing its core business.

AI summaries pressure Google’s search advertising

At first glance, Alphabet’s quarterly results looked strong. Total revenue rose 25% from a year earlier to $127.6 billion, helped by Google Cloud revenue, which increased 103% to almost $31 billion.

Profit fell 25% during the quarter. Alphabet also posted negative free cash flow of more than $9 billion, only the second time it had done so as a public company and almost twice the cash loss recorded three months earlier.

Free cash flow represents the cash a company retains after paying for operations and investments. Alphabet was spending more money than it brought in, and almost all of that new spending went to Google’s AI investments.

By Thursday’s close, Alphabet’s market value stood at $3.46 trillion, down from $3.97 trillion the previous day. Google Search now defaults to AI summaries of a user’s query, and those summaries reduced the number of advertisements Alphabet could sell during the quarter.

The sale of ads alongside Google Search results accounts for the vast majority of Alphabet’s business. Tracy Woo, a principal analyst at Forrester, said Alphabet’s disappointing search business results “highlights the challenge of funding massive AI investments while maintaining the strength of established businesses.”

Phillip Schindler, Google’s chief business officer, said on Wednesday that he felt “very good about our trajectory” with an AI-focused version of search. Alphabet’s stock then fell almost 13% on Thursday, its second-lowest showing this year.

Amazon’s growth comes with a $42 billion cash drain

Amazon shares fell 6% in after-hours trading on Thursday after its results disappointed investors. Quarterly sales grew 11% to $201 billion, but the company reported negative cash flow of $42 billion.

Amazon was spending more money than it generated, and its spending had increased sixfold over three months. Chief Executive Andy Jassy said the outlays reflected the chance to build two businesses that could each generate $1 trillion in revenue.

Jassy said: “There has never been a trillion dollar revenue business, and we may have two of them in the next 5-10 years.” He did not specify what those two businesses might be, leaving investors with a projection of scale but no company-named roadmap.

Microsoft pairs AI demand with lower investment

Microsoft shares fell by less than 1% on Thursday, a milder response than the selloffs in Alphabet and Amazon. The software group, one of OpenAI’s largest investors, spent around $5 billion less on AI-focused investments.

Microsoft also outlined plans earlier in the week to cut thousands of workers, which would further reduce costs. Revenue grew 19% from a year earlier to $92.3 billion, while its crucial cloud business expanded 30% to $63 billion.

Satya Nadella said Copilot, Microsoft’s AI chatbot and tool, had seen “automated tasks nearly double since July” as daily users grew 500% from a year ago. Lower spending and growing sales usually earn a positive investor response.

Wall Street instead looked farther ahead, weighing which businesses will capture the value from their large AI promises. Woo said: “Microsoft's results reinforce that enterprise demand for AI remains strong, but they also highlight a much bigger question facing the technology industry, where AI value will ultimately be captured.”

What does this change for AI investors and operators?

For investors, the practical change is that AI spending can no longer be treated as a distant promise. Alphabet and Amazon now carry multibillion-dollar cash costs, while Microsoft offers evidence that strong enterprise demand can coexist with lower AI investment.

For operators, the burden of proof has shifted to monetization. Alphabet’s search-ad pressure shows how AI interfaces can weaken an established revenue engine, while Amazon’s unidentified $1 trillion businesses leave the timing and payoff of its ambition uncertain.

The market’s response sets a tougher standard for Alphabet, Amazon and Microsoft: show where AI revenue will exceed infrastructure spending. Otherwise, the capital required to stay in the AI race will keep obscuring whether these companies create new growth or merely weaken the core businesses financing it.

The next test is whether AI products can generate durable revenue quickly enough to offset infrastructure outlays. That proof matters most to investors now watching whether the AI race strengthens or strains the established operations paying for it.