What happened
Google parent Alphabet lost just over $500 billion in market value on Thursday, after its latest business update rattled Wall Street. The company's value fell from $3.97 trillion to $3.46 trillion in a single day, and its stock dropped almost 13% to a six-month low.
The trigger was search. Google now defaults to AI summaries at the top of results, and the company revealed those summaries cut into the number of ads it sold during the quarter. Search ads are still the vast majority of Alphabet's business, so even a small dent lands hard.
At first glance the quarter did not look bad. Total revenue grew 25% from a year earlier to $127.6 billion, helped by Google Cloud, where revenue more than doubled to almost $31 billion. But profits fell 25%, and for only the second time as a public company, Alphabet posted negative free cash flow of more than $9 billion, nearly twice the cash loss of three months ago.
Free cash flow is the money left after paying for operations and investments. Alphabet is now spending more than it brings in, and that spending is almost entirely aimed at AI.
Why it matters
This is the clearest sign yet that the AI race has a bill attached, and investors are starting to ask when it gets paid. Alphabet, Microsoft and Amazon all updated investors this week, and all three plan to keep pouring enormous sums into AI. The market's reaction suggests patience is thinning: growth in the core business has to keep up with the spending, and this quarter it did not.
Tracy Woo, a principal analyst at Forrester, said the disappointing search results "highlight the challenge of funding massive AI investments while maintaining the strength of established businesses." Google chief business officer Phillip Schindler had said on Wednesday that he felt "very good about our trajectory" with an AI-focused search engine. The stock market disagreed the next day.
Amazon took a hit the same day. Its shares fell 6% in after-hours trading after it reported 11% sales growth to $201 billion alongside negative cash flow of $42 billion, a figure six times larger than three months earlier. Chief executive Andy Jassy said the company was spending because it may have two businesses that could each reach $1 trillion in revenue in the next 5 to 10 years, though he did not say which two. The AI boom has already produced huge valuations elsewhere: [Anthropic's IPO](/article/anthropic-ipo-leaves-public-investors-little-control) left public investors with little control over the company, a sign of how much leverage AI firms currently hold.
For ordinary investors, the drop matters because Alphabet sits in most major index funds and retirement accounts. A $500 billion swing in one company moves portfolios far beyond Silicon Valley.
What happens next
The question now is whether Google can fix the search ads problem without slowing its AI push. The company has bet that AI summaries keep users on Google instead of losing them to chatbots, and [Microsoft's own AI spending](/article/microsoft-made-10-billion-from-openai-one-quarter) shows rivals are making the same expensive bet. If ad revenue keeps slipping while AI costs climb, expect more pressure from investors for proof that the spending pays off.
The next test comes with the next quarterly update, when Wall Street will check whether search ads stabilized or kept sliding. Until then, the AI race looks less like a victory lap and more like an open tab.
