Alphabet spends more on AI than it earns in cash. Investors noticed

What happened

Alphabet, Google's parent company, reported third-quarter revenue of $127.6bn on 28 October, up 25% on a year earlier but below analysts' forecasts. Earnings per share were $2.12, against about $3 expected, partly because of an $8.7bn loss on its investments in other companies, Bloomberg reported. Search revenue grew 12%. The shares fell about 10% in after-hours trading.

The bright spot was Google Cloud, which rents computing power to other companies, including AI developers: its revenue more than doubled to $30.7bn and its operating profit reached $11.1bn.

Why cash flow, not profit, is the number to watch

A company's profit spreads the cost of a data centre over many years. Its cash flow shows the money going out today. In the third quarter Alphabet's operations brought in $42.3bn of cash, but it spent $51.4bn on capital investment, mostly servers and data centres. That left free cash flow, the cash left after investment, at minus $9.1bn: the second negative quarter in a row, which Bloomberg says had never happened since Google went public. The company expects to spend up to $205bn this year, more than double last year.

A company can run negative free cash flow for a while by drawing on savings or borrowing. It becomes a problem only if the investment does not eventually produce enough revenue. That is the question investors are asking about AI: the spending is certain and immediate, the returns are not.

Why it matters beyond one company

The largest technology firms are now among the biggest investors in the US economy. Their spending on chips, buildings and power supports construction jobs and economic growth. If results like these lead them to slow that spending, the effect would reach far beyond their own shareholders. See our explainer on how much the US economy now depends on AI.

Where it sits in the chain

This is Link 5, the real economy. Business investment is one of the main engines of growth, and AI is the largest investment wave of the moment. Its pace depends on whether investors keep funding it.

What to watch

• Whether Alphabet keeps or cuts its spending plans when it gives 2027 guidance.
• Results from the other big spenders (Amazon, Meta, Microsoft) and whether they keep investment growing.
• Google's ability to charge for AI search answers, which the company says earn less than traditional search for now.

Disclosure: drafts on this site are prepared with the help of Claude, an AI model made by Anthropic, which is a customer of Google Cloud. This article reports results and does not assess any company's shares.