Alphabet shares dropped 10% in premarket trading on Thursday following third-quarter financial results that fell short of expectations on cash generation and core search advertising.
If the stock closes Thursday's session with a decline exceeding 9.77%, it will mark the worst post-earnings drop for the company since its initial public offering in 2004. The sharp decline weighed on broader technology markets, pulling Nasdaq-100 futures down by more than 1% early Thursday.
Cash Deficit and Search Miss
Investor selling centered on Alphabet's cash flow performance alongside its ongoing artificial intelligence infrastructure spending. The company recorded negative free cash flow of $9.07 billion for the third quarter, significantly deeper than the negative $2.70 billion projected by market analysts.
Despite the cash drain, Alphabet maintained its full-year capital expenditure outlook between $195 billion and $205 billion. Meanwhile, core search advertising revenue rose 12% during the September quarter to reach $63.35 billion, falling short of analyst expectations.
Alphabet Chief Business Officer Philipp Schindler attributed part of the weakness in search revenue to lower monetization in AI Mode. Schindler stated that the firm is working to expand advertisements across AI Overviews and AI Mode globally.
Divergence From Microsoft
The market reaction highlighted differing Wall Street views on capital allocations among major tech companies. In contrast to Alphabet, Microsoft shares advanced nearly 4% in premarket trade on Thursday.
Microsoft posted third-quarter capital expenditures and finance leases of $45.2 billion, which came in below the $50.67 billion forecast by analysts. Microsoft also delivered positive free cash flow of $18.63 billion for its quarter.
Ben Barringer, global head of technology research at Quilter Cheviot, noted that "Microsoft is building out its architecture in a measured way and as such contains fewer surprises." Barringer added that Alphabet saw its share price drop after a messy report and earnings call, pointing to an innovator's dilemma between protecting its core search model and adopting disruptive artificial intelligence.
Thursday's market close will determine whether Alphabet's loss exceeds the 9.77% record set following previous earnings reports.
