Massive AI spending sparks market panic! Google's parent company Alphabet (GOOGL.US) plummeted by more than 12%, the biggest drop since listing, and its market capitalization evaporated by about 500 billion US dollars
The Zhitong Finance App learned that the stock price of Google's parent company Alphabet (GOOGL.US, GOOG.US) plummeted by more than 12% on Thursday, the biggest one-day decline since its launch in 2004, and the market value evaporated by about 500 billion US dollars. The third-quarter earnings report released earlier showed that Alphabet's free cash flow unexpectedly turned negative, and the growth of the core search advertising business fell short of expectations, further exacerbating investors' concerns about the tech giant's huge return on artificial intelligence (AI) investment.
In contrast, the stock price of Microsoft (MSFT.US), which also invests heavily in AI infrastructure, was basically flat on Thursday. Analysts pointed out that the differences between the two companies in terms of capital expenditure, cash flow performance, and AI commercialization progress have become an important reason for the marked divergence in market responses.
Free cash flow unexpectedly turned negative, causing concern over Alphabet's huge AI spending
Alphabet's post-market earnings report on Wednesday showed that the company's free cash flow for the third quarter was negative $9.07 billion, far lower than analysts' previous expectations of positive $2.7 billion. This means that although Alphabet continues to expand investment in AI infrastructure, the cash flow from its operating activities during the quarter is no longer sufficient to cover capital expenses, causing investors to worry about the company's cash flow situation and the return cycle of AI investment.
At the same time, Alphabet maintained its annual capital expenditure guideline of US$195 billion to US$205 billion, indicating that the company still plans to invest huge sums of money to build data centers and other AI infrastructure.
As the scale of AI investment continues to expand, Wall Street is paying more and more attention to whether technology companies can turn huge capital expenses into actual revenue and profit growth, rather than just expanding the scale of computing power.
In contrast, Microsoft's total capital expenditure and financial leasing for the third quarter was US$45.2 billion, up 30% year over year, but it fell short of analysts' expectations of US$50.67 billion. Microsoft's free cash flow for the quarter fell 27% year over year to US$18.63 billion, but it remained positive, in stark contrast to Alphabet's cash flow performance.
Ben Barringer, head of global technology research at Quilter Cheviot, said that Microsoft is building AI infrastructure in a more careful and orderly manner, so there are relatively few surprises due to its performance. He pointed out that the financial data released by Alphabet was quite chaotic, and management's poor communication performance during the earnings conference call further exacerbated the negative reaction of the market.
Core search ad growth falls short of expectations, AI commercialization challenges emerge
In addition to huge capital expenses, the performance of Alphabet's core search advertising business also disappointed investors.
According to financial reports, Google's third-quarter search ad revenue increased 12% year over year to 63.35 billion US dollars, but it was still lower than analysts' expectations. As Alphabet's largest revenue source, the growth performance of the search advertising business directly affects investors' judgment on the company's profit prospects.
Alphabet's chief commercial officer Philipp Schindler said that the performance of the search business was partly affected by the relatively low level of commercialization of AI Mode.
As more and more users obtain information through AI-generated answers, traditional search ad display and monetization models are facing adjustments. Schindler pointed out that Alphabet is currently expanding the scale of advertising in AI Overviews and AI Mode, and promoting related commercialization measures to the international market.
However, the market is still worried that the popularity of AI search products may weaken the profitability of traditional search advertising businesses.
Furthermore, AI chatbots such as ChatGPT by OpenAI and Claude by Anthropic are rapidly developing, and are also changing the way users obtain information. Some users may transfer queries originally completed through Google search to other AI platforms, posing a challenge to the search business that Google has dominated for a long time.
Barringer believes that Google is currently facing a typical “innovator dilemma”. On the one hand, it needs to protect traditional search advertising as a core source of profit, and on the other hand, it must actively embrace AI technology that may disrupt existing business models.
He pointed out that Google has yet to find an ideal balance in this process, the competitive performance of its Gemini products has failed to keep up with some of its peers, and is also in a relatively backward position in the field of intelligent AI.
Opinions on Wall Street are divided: Google's large user base is still an important advantage
Despite market concerns about Alphabet's return on AI investment and search business prospects, some Wall Street analysts believe that Google's long-term competitive advantage has not fundamentally changed.
Scott Devitt, an analyst at Rosenblatt Securities, said that the challenges facing commercialization of AI search are not unique to Alphabet, but rather problems that the entire consumer-oriented AI industry needs to solve. He believes that whether it is an AI agent or a large-scale language model, related companies will eventually need to find a sustainable commercialization model, so the current monetization pressure Google is facing does not mean that the search industry has fundamentally changed.
Devitt pointed out that Google has about 4 billion users in the global search market, and this huge user base is expected to gradually transform into AI product users as AI functions become popular. “I don't think this means a fundamental change in the industry.” Devitt said, “If this is a problem for Alphabet, then it's also a problem for any consumer-facing AI agent or large language model.”
He further pointed out that the relevant commercialization challenges are expected to eventually be solved, and Alphabet, which has 4 billion search users, will be in an enviable competitive position at that time.
Overall, the sharp drop in Alphabet's stock price highlights that as the scale of AI infrastructure investment continues to expand, investors' evaluation criteria for tech giants are changing. Compared to simply focusing on the progress of AI technology and the scale of capital expenditure, the market is paying more attention to free cash flow, core business growth, and the actual monetization capacity of AI products.
For Alphabet, how to improve the commercialization efficiency of AI products while maintaining competitiveness in the search advertising business and proving that huge capital expenditure can bring a sustainable return on investment will be the key to determining its future valuation performance.