Alphabet Stock Drops $500 Billion as AI Search Hits Ad Sales

Alphabet, the parent company of Google, lost roughly $500 billion in stock market value on Thursday after investors reacted to signs that the company's AI-driven search summaries are cutting into the advertising business that funds most of its operations, according to BBC News. By the end of trading, Alphabet's total market value had fallen to $3.46 trillion from $3.97 trillion the day before, the BBC reported.

The drop came even though Alphabet's headline numbers looked strong on their face. Total revenue grew 25% compared with a year earlier, lifted by Google Cloud revenue that climbed 103%, the BBC reported.

Why did investors react so sharply to an earnings beat?

Profit at Alphabet fell a considerable 25% during the quarter, and the company posted negative free cash flow for only the second time in its history as a public company — nearly double the cash shortfall it reported three months earlier, according to the BBC. Free cash flow measures the money a company keeps after paying for operations and investments, so a negative figure means Alphabet is spending more than it brings in, largely because of AI investment, the outlet reported.

The immediate trigger was Google's search engine, which now defaults to AI-generated summaries of a user's query. That shift cut into the number of ads the company could sell, and ad sales alongside search results make up the vast majority of Alphabet's business, the BBC reported. Alphabet shares fell almost 13% on Thursday, their second-lowest showing of the year, according to the BBC.

What are Alphabet executives saying about the AI shift?

Phillip Schindler, Google's chief business officer, told investors Wednesday that he felt "very good about our trajectory" with an AI-focused version of search, the BBC reported. Google chief executive Sundar Pichai has backed the company's heavy AI spending, according to the BBC.

Tracy Woo, a principal analyst at Forrester, offered a more cautious read. The disappointing search results, she said, "highlights the challenge of funding massive AI investments while maintaining the strength of established businesses," according to the BBC.

"Highlights the challenge of funding massive AI investments while maintaining the strength of established businesses." — Tracy Woo, principal analyst, Forrester

Did other tech companies see the same pressure?

Amazon also disappointed investors this week, with shares falling 6% in after-hours trading, the BBC reported. The company posted sales growth and a sharp cash flow deficit tied to its own AI spending, which grew sixfold over three months, according to the BBC. Chief executive Andy Jassy told analysts the spending reflects the chance to build what he described as two businesses that could each eventually generate $1 trillion for Amazon, though he did not specify which businesses, the BBC reported.

Microsoft likewise told investors this week that it plans to keep spending heavily on AI, joining Google and Amazon in a race that is reshaping how Wall Street values the three companies' core businesses, according to the BBC.

What happens next for Alphabet's stock?

The BBC's reporting does not indicate how Alphabet plans to address investor concerns about AI's effect on search ad revenue beyond Schindler's comments, and the company has not announced a change in its AI spending strategy.

Artiglio is A coming-soon iPhone chief of staff for briefings and drafts. Not on the App Store yet.