Alphabet reported a disappointing quarter with revenue of $127.6 billion for Q3, slightly missing the expected $128.2 billion, and adjusted EPS falling 7% to $2.67, below the $3.02 forecast. Operating income rose 30% year-over-year to $40.6 billion, yet still lagged expectations. The stock took a hit, dropping nearly 10% after hours, marking the first time in almost four years that Alphabet missed both top- and bottom-line estimates. The company also registered another quarter of negative free cash flow and flagged significant increases in AI-related spending for the upcoming year.

On a positive note, Google Cloud and AI developments stood out as bright spots. Google Cloud revenue doubled year-over-year, reaching $30.71 billion and exceeding projections, with segment operating income tripling to $11.12 billion. CEO Thomas Kurian highlighted that the cloud unit now boasts 18 product lines generating over $1 billion each, and the backlog increased to $561 billion. Alphabet’s AI product Gemini surpassed 1 billion monthly active users, the fastest growth in company history, with usage of AI tokens growing 40% sequentially and quadrupling from a year ago.

However, challenges continue in Alphabet’s core Search business, with revenue climbing only 12% year-over-year to $63.35 billion while growth rates slowed for a second consecutive quarter. Though search queries grew at their fastest clip in five years, Alphabet faces concerns about AI cannibalizing ad revenue, as increased AI query volumes have lower monetization rates. Total ad revenue rose 10.5%, trailing Meta Platforms’ 26% jump, partly due to foreign exchange headwinds and normalized spending post-World Cup. Leadership plans to expand AI mode ads internationally but must prove it can monetize these effectively.

Financially, capital expenditures are expected to surge to over $300 billion in 2027, up from $195-205 billion this year, driven by investments in data centers and servers. Free cash flow was negative $9.07 billion in Q3 due to capex and a $5.2 billion European Commission fine payment. Alphabet ended the quarter with $265.1 billion in cash but carries substantial future purchase commitments. Given nearly $27 billion remaining in its equity offering and management’s ongoing share sales, the stock remains under pressure. Although shares trade at about 20 times forward earnings—a more reasonable valuation—the outlook hinges on better operational results to restore investor confidence.