Alphabet lost just over $500bn (£374bn) in value on Thursday, and the reason is worth examining closely. The company's quarterly revenue grew 25% to $127.6bn, and Google Cloud revenue rose 103% to almost $31bn. On a headline basis, that looks healthy. The problem sits underneath those figures.
Profits fell by a considerable 25% during the quarter. Alphabet also posted negative free cash flow of more than $9bn, its second such result in its history as a public company, and almost twice the cash loss it showed just three months earlier. Cash flow is the money left after operations and investments, so a negative number means the company is spending more than it brings in. According to the report, that new spending is almost entirely dedicated to Google's AI investments.
The sharpest concern is the search business. The report says Google's search engine now defaults to AI summaries of a person's query, and that this affected the number of advertisements the company could sell. Ads on search results are the vast majority of Alphabet's business. Tracy Woo, a principal analyst at Forrester, said the results "highlights the challenge of funding massive AI investments while maintaining the strength of established businesses." That sentence captures the dilemma better than any executive reassurance.
Google's chief business officer, Phillip Schindler, said on Wednesday that he felt "very good about our trajectory" with an AI-focused version of the search engine. Investors did not share that confidence on Thursday. The stock fell almost 13%, its second-lowest showing this year, and the company's total market value dropped from $3.97 trillion to $3.46 trillion by the end of the day.
Microsoft and Amazon are making similar commitments to astronomical AI spending, so Alphabet is not alone in this bind. Still, the lesson for Alphabet should be plain. Spending heavily on the future is defensible only if the core business keeps paying the bills while that future arrives. Right now, investors are signalling that the balance has tipped too far. Alphabet should show clear, measurable progress on AI revenue and protect its search advertising before asking shareholders to keep funding the race.