Google Shares Drop 11% as AI Search Ads Weigh on Growth

Alphabet shares fell roughly 11% in after-hours trading Wednesday after the company reported third-quarter revenue of $127.6 billion, just under analyst projections of $127.93 billion, and earnings per share of $2.12 against expectations of $2.99. The EPS figure dropped 26% due to an unrealized loss on Alphabet's SpaceX stake, the company said.

Revenue rose 25% from $102.3 billion in the same period last year. Google Services, which includes advertising, subscriptions, digital content and hardware, brought in $96.3 billion, up 11% year over year. Advertising contributed $82 billion of that — below the $83.5 billion analysts expected. Google Cloud revenue reached $30.7 billion, up 103%, and Alphabet's operating margin stood at 31.8%.

Why did search growth slow?

Google's core search business grew 12%, down from 17% in the second quarter. Chief business officer Philipp Schindler attributed the deceleration to foreign exchange rates and one-off ad spend dips in Asia-Pacific among advertisers hit by the EU's elimination of its de minimis exemption on low-cost imports. He also pointed to AI Mode, Google's AI-powered search experience, which carries fewer ads and therefore makes less money.

"The strong growth in AI Mode queries had an impact [on decelerating Google Search growth] because of the lower monetization we are seeing in AI Mode," Schindler said.

The fix is more advertising inside AI search. Ad tests in AI Mode have returned "promising results," Schindler said, and Google plans to scale ads in both AI Mode and AI Overviews to more users across a wider range of queries. That includes expanding AI Mode ads into international markets for the first time and launching multi-turn ads in the U.S. Click-through rates for sponsored and organic product listings in AI Mode are "similar," Schindler noted. "To be clear, we feel very good about our trajectory here," he said.

There was no mention of publisher traffic on the call. Some publishers are now opting out of Google Search entirely over the company's use of the same web crawler for search indexing and AI; others are suing Google for allegedly suppressing their ad revenues. On the July second-quarter call, CEO Sundar Pichai claimed AI search was "sending billions of clicks to websites every week."

How much is Google spending on AI?

Capital expenditures hit $51.4 billion for the quarter, spent primarily on AI infrastructure. Analysts note Alphabet has effectively transformed from a cash-printing ads business into a capital-intensive AI infrastructure company, taking on more debt to support roughly $1 trillion in contractual commitments covering spending promises and backstops.

Google says it has secured $561 billion in future cloud revenue from customer contracts. A major chunk is reportedly tied to one customer: The Information reported in May that Anthropic committed to spend $200 billion with Google Cloud over five years. If Anthropic or other cloud partners stumble financially, Google is likely to feel the pain.

The company has also started renting computing capacity from third-party providers to keep up with demand while it builds its own data centers. That expense will pressure margins in the short term, said finance chief Anat Ashkenazi. Google did not adjust its full-year capex projections, and Ashkenazi said capex is still expected to "increase significantly" in 2027.

What about advertising tools and YouTube?

Gemini helped create 1.5 billion ad campaign assets during the quarter, up sevenfold year over year. YouTube ads grew 9% to $11.2 billion, and Amazon is teaming up with YouTube Shopping to let U.S. creators tag Amazon products.

Leaders also told investors that agentic commerce is a growing focus. The open-source Universal Commerce Protocol already lets "hundreds of thousands of brands" including Nike, Chewy and Tapestry switch on direct agent-led checkout. "Users like choice, and they want to consider things way beyond price, like brand loyalty, customer service, and so on. So we're really architecting these agentic workflows in a way that we can intentionally design the time and the space for users to explore those choices," Schindler said. He added: "We're actually confident that we can provide really interesting, compelling advertising models for agentic use cases."

The earnings landed a day after Google unveiled Genie 4, a realistic world model, and hours after it debuted Gemini 4 Carbon, which the company bills as its "strongest model" yet, claiming "significant gains" in agentic tasks, coding and cybersecurity use cases including vulnerability detection.

Wall Street's key question now is whether Google can justify its enormous AI investments — and the answer depends heavily on how quickly ads inside AI search and agentic experiences start paying off.