Alphabet’s cloud revenue doubled in the third quarter. Investors nevertheless focused on an earnings miss and negative free cash flow after the company released its results on Wednesday.
Alphabet reported third-quarter revenue of $127.6 billion, below the $128.0 billion expected by analysts. Earnings per share came in at $2.12, against Wall Street consensus estimates of $3.02.
The company’s $51.4 billion spending on artificial intelligence resulted in negative free cash flow of $9.1 billion. Alphabet shares fell 7% in after-hours trading following the report.
The concern is straightforward: investors fear hyperscalers are failing to produce enough revenue to justify debt-fuelled infrastructure investments. A portfolio manager said: “The companies that can show they are producing cash for shareholders are more in the driver's seat in this market than companies that aren't.”
Alphabet’s overall revenue still grew 25% from a year earlier. It also had an $8.6 billion paper loss on equity stakes, attributed to its investment in SpaceX.
Microsoft offered a contrasting result on the same day. Its shares jumped after its cloud revenue beat estimates. “The fear gauge is clearly on high alert about all this spending,” a portfolio manager said, adding that Microsoft “is getting a benefit because it has an eye toward that discipline.”
Whether Alphabet’s after-hours decline persists when regular trading resumes remains unknown. The immediate test for shareholders is whether spending on AI infrastructure can produce cash as well as revenue.
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