Alphabet shares fell 13% in early trading on Thursday after its third-quarter report showed negative cash flow and search revenue below estimates. The drop put the stock on course for its worst post-earnings reaction since the company went public in 2004.
Alphabet plummeted 13% in early trading on Thursday while Microsoft was little changed, as investors focused on the two companies' spending and free cash flow numbers. The earnings report comes as investors scrutinize the AI spending plans of tech companies and the returns on those investments.
If Alphabet closes more than 9.77% lower, it would be its worst post-earnings reaction ever. Business Insider reported that the slide could cut more than $400 billion from Alphabet's $3.95 trillion market capitalization.
Cash burn and AI spending weigh on Alphabet
Alphabet reported negative free cash flow of $9.07 billion for the third quarter, far below the $2.70 billion analysts expected. The company also maintained its full-year capital expenditure guidance of between $195 billion and $205 billion.
The Financial Times reported that capex grew to $51.3 billion in the quarter, up from $44.9 billion in the second quarter. It added that Alphabet's net income fell 25% to $26.2 billion, well short of analysts' expectations of $37.3 billion.
Search revenue misses estimates
Search also disappointed. Revenue in Alphabet's largest division rose 12% year on year to $63.4 billion, missing estimates of $64.9 billion.
That came as a shock, because search revenue had beaten estimates in each of the previous four quarterly reports. Chief business officer Philipp Schindler said on the call that strong growth in AI Mode queries had an impact because of lower monetization in that product.
Microsoft draws a calmer reaction
Microsoft reported $45.2 billion in capital expenditures and finance leases for the quarter, 30% higher than a year ago but below analyst projections of $50.67 billion. Its free cash flow fell 27% to $18.63 billion but remained positive.
Bernstein senior analyst Mark Shmulik wrote in a note: "Is Google an AI winner? Probably, but not today."
Sources: CNBC, Business Insider, Financial Times
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