Alphabet shares fell by as much as 8% in after-hours trading despite a sharp rise in Google Cloud revenue, as heavy artificial intelligence spending pushed the group’s free cash flow further into negative territory.
Google Cloud revenue more than doubled to $30.7 billion in the third quarter, helping offset slower growth from Google Search and YouTube.
Alphabet reported total revenue of $127.6 billion, up 25% from $102.3 billion a year earlier and broadly in line with analysts’ expectations of $127.9 billion.
Reported earnings fell to $2.12 a share from $2.87. The decline included an $8.7 billion paper loss on Alphabet’s equity investments, which reduced earnings by 55 cents per share.
Operating income increased by 30% year on year to $40.6 billion, although it was slightly below the $40.8 billion recorded in the previous quarter.
Capital expenditure reached $51.4 billion, more than double the $24 billion spent during the same quarter last year, as technology companies compete to expand their computing capacity for artificial intelligence.
The spending contributed to negative free cash flow of $9.1 billion, compared with negative $5.9 billion in the second quarter. The results were Alphabet’s first full quarterly update since it announced in June that it had raised $84.8 billion in equity, including $10 billion from Berkshire Hathaway, to fund an AI buildout.
Google Cloud’s profit margin nevertheless widened to 36.2%, easing concerns among investors that it had reached a peak in the previous quarter, according to Melissa Otto, global head of Visible Alpha Research at S&P Global.
Alphabet chief executive Sundar Pichai said: “We had a strong quarter and are now on a half-trillion dollar revenue run rate. Our deep full stack approach is driving momentum across the business, with Alphabet revenues growing 25% year-over year.”
