Alphabet sheds $500bn as AI search features dent Google advertising income

Alphabet saw more than $500 billion wiped from its market valuation in a single day after disclosing that its artificial intelligence search overviews are cutting into advertising revenues, sparking broader worries across Wall Street over high-stakes technology spending.

Shares in Google's parent organisation tumbled nearly 13% on Thursday to a six-month low, dropping its total market capitalisation from $3.97 trillion to $3.46 trillion. The dramatic sell-off came after the company delivered its final corporate update of the year, which revealed the operational toll of its costly push into generative artificial intelligence.

While Alphabet reported an overall quarterly revenue increase of 25% to $127.6 billion, driven largely by a doubling of sales in its Google Cloud division to nearly $31 billion, profitability suffered sharp declines. Net profit fell by 25% for the period, and free cash flow turned negative by more than $9 billion. The figure marks only the second instance of negative cash flow since the firm went public and roughly doubles the cash deficit recorded in the prior quarter.

The primary source of financial strain stems from Google's decision to show AI-generated query summaries by default on its search platform. Because the search engine acts as the financial backbone of Alphabet, providing the vast majority of its income through ad placements, fewer ad sales during the period directly weighed on earnings. Although chief business officer Phillip Schindler stated he felt very confident about the company's direction with an AI-focused search model, investors responded with steep selling.

Industry analysts pointed out that the findings highlight a central dilemma for major tech companies trying to fund massive capital expenditures in AI without eroding the profitability of their core offerings.

Unease over heavy artificial intelligence expenditures also spread to other major industry players. Amazon saw its shares drop 6% in after-hours trading following an update that showed quarterly sales climbing 11% to $201 billion alongside a negative cash flow of $42 billion. Chief executive Andy Jassy defended the sharply accelerated outlay, pointing to commercial opportunities in proprietary computer chips and the Bedrock developer platform.

Microsoft experienced a milder market reaction, with its stock declining by less than 1% on Thursday. The firm reported revenue growth of 19% to $92.3 billion, cut its AI investments by around $5 billion, and announced job cuts to manage overhead costs. Even so, market observers noted that investors are increasingly asking how and when tech firms will translate substantial AI infrastructure investments into sustainable commercial returns.