Alphabet, the parent company of Google, suffered a sharp drop in market value after investors reacted to signs that its push into AI is beginning to undermine a key source of income: search advertising.
The company’s shares fell more than 12% after its latest financial results, wiping roughly $500bn from its stock market valuation. Alphabet ended the day valued at about $3.46tn, down from nearly $3.97tn the previous session.
Philipp Schindler, Google’s chief business officer, acknowledged that the company’s conversational AI search feature was reducing some advertising revenue generated by conventional search queries. Despite the pressure, he said the company remained confident in the direction of its AI-powered search strategy.
Google has faced growing competition as consumers increasingly turn to AI services, including Claude and ChatGPT, for answers that might once have been sought through a traditional search engine.
Kim Scott, a former Google advertising executive, said the company appeared willing to accept short-term financial pain rather than allow rivals to take its customers. Speaking to the BBC, she described the strategy as a long-term investment in AI, consistent with Google’s history of placing major bets on emerging technology.
Alphabet reported revenue of $127.6bn for the three months ending in September, representing an annual growth of 25%. However, the figures fell short of market expectations, with advertising performance proving particularly disappointing.
Analysts said the results illustrated the difficulty of financing enormous AI programs while protecting established businesses. The figures exposed the tension between maintaining Google’s core search operation and funding its expansion into AI.
The same concern has spread across the wider technology sector.
Amazon reported quarterly revenue of $201bn, an 11% increase from a year earlier, but its cash flow turned negative by $42bn. The figure reflected the enormous cost of its investment program, which has expanded rapidly as the company competes for a leading position in AI infrastructure and services.
CEO Andy Jassy defended the spending, arguing that Amazon could eventually develop multiple businesses capable of generating enormous revenues. He pointed to cloud computing, retail, custom-designed chips, and its Bedrock AI platform as areas with significant potential.
Microsoft received a less severe response from investors. Its shares slipped by about 1%, despite the company reporting a 19% increase in quarterly revenue to $92.3bn. Cloud sales rose 30%, while spending on AI-related investment was about $5bn lower.
CEO Satya Nadella also reported strong growth in the use of Microsoft’s Copilot tools, saying automated tasks had nearly doubled since July and daily usage had risen sharply over the previous year.
The investor scrutiny on AI spending is likely to sharpen the focus of firms like Core AI Holdings Inc. (NASDAQ: CHAI) on ensuring that they squeeze maximum value from the AI tools they use in their operations.
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