Alphabet, the parent company of Google, reported a 25% increase in third-quarter revenue to $127.6 billion, powered by strong demand for artificial intelligence (AI) services and rapid growth in its cloud business. However, the results fell slightly short of Wall Street expectations, while weaker-than-anticipated advertising sales and rising AI infrastructure costs disappointed investors. Alphabet shares dropped sharply in after-hours trading following the earnings announcement on October 28.
The company’s revenue for the quarter ended September 30 rose from $102.35 billion in the same period last year. Despite the strong annual growth, analysts had expected revenue of around $127.9 billion. Earnings per share came in at $2.12, below estimates of approximately $3.01, adding to concerns about the impact of investment-related losses and the cost of expanding AI operations.
Alphabet’s net income fell to $26.17 billion from $34.98 billion a year earlier. The decline came despite higher revenue and operating income, partly because the company recorded a substantial loss on investments. Operating income increased 30% to $40.58 billion, while its operating margin stood at about 31.8%, reflecting continued strength in its core operations.
The results highlight a growing challenge for Google: its AI investments are generating significant demand, but investors want clearer evidence that the spending can translate into sustained earnings and cash generation.
Google Cloud was the standout performer in the quarter. Revenue from the division more than doubled, rising 103% year-on-year to a record $30.71 billion. The growth was driven by demand for AI infrastructure, cloud computing services and enterprise AI solutions. The business also benefited from demand for Google’s custom tensor processing units, or TPUs, which are designed to support AI workloads.
The cloud division’s revenue exceeded analysts’ expectations of about $29.1 billion. Operating income from Google Cloud climbed to $11.12 billion from $3.59 billion a year earlier, showing that the business is expanding while becoming more profitable.
The performance suggests that companies are increasingly willing to pay for the computing power and software needed to develop and run AI applications. Google Cloud competes with Amazon Web Services and Microsoft Azure, and its recent growth gives Alphabet a stronger position in the race to supply AI services to businesses.
Google’s advertising business, however, delivered a less impressive result. Advertising revenue rose to $82.01 billion from $74.18 billion a year earlier, but fell short of analysts’ expectations of about $83.5 billion. Search and other advertising revenue increased 12% to $63.35 billion, while YouTube advertising revenue grew 9% to $11.21 billion.
Although both businesses continued to expand, the shortfall raised questions about whether Google can maintain its advertising momentum as competition in online search and digital marketing intensifies. Advertising remains central to Alphabet’s finances, making even a modest miss significant for investors.
The company is also navigating changes in how people search for information. AI-powered tools allow users to ask complex questions and receive direct answers, creating opportunities for Google to offer new services while raising concerns about how these experiences could affect traditional search advertising.
Chief Executive Sundar Pichai said AI was contributing to growth in search activity. He also highlighted the rapid adoption of the Gemini app, which has reached one billion users, according to the company. Alphabet has been expanding its Gemini models and integrating AI features across search, cloud services and other products.
The company’s challenge is to make these tools commercially successful without weakening the advertising model that has funded much of its expansion. Competition from other AI developers and technology companies is adding pressure to move quickly while maintaining reliable products and services.
Investors are also watching Alphabet’s spending plans closely. The company has been investing heavily in data centres, computing chips and other infrastructure required to train and operate advanced AI systems. These investments can support future growth, but they require substantial upfront spending and may take time to generate returns.
Alphabet’s free cash flow turned more negative during the quarter, reaching approximately $9.1 billion in negative territory, compared with a negative $5.9 billion in the previous quarter. The change reflected the growing cost of building capacity and funding AI research. The company has also indicated that capital expenditure is expected to rise significantly in 2027.
The market reaction reflects a tension between strong long-term growth prospects and near-term financial pressures. Google Cloud’s performance suggests that demand for AI infrastructure is real and expanding, but the advertising shortfall and higher spending have made investors more cautious.
Alphabet continues to benefit from its global search business, YouTube, subscriptions and cloud services. Yet the latest results show that revenue growth alone may not be enough to satisfy markets when earnings and cash flow face pressure.
As the AI race accelerates, Alphabet will need to demonstrate that its investments can support profitable growth across its businesses. The coming quarters will be important in showing whether cloud momentum can continue, advertising can meet expectations and AI products can create new revenue without undermining Google’s established business model.