Alphabet sheds $500bn in value as AI spending and search changes unsettle Wall Street

Google parent Alphabet lost just over $500bn (£374bn) in market value on Thursday after a business update that rattled Wall Street, sending its stock to a six-month low. By the end of the trading day, the company's total stock market value had fallen to $3.46 trillion from $3.97 trillion the day before, a decline of almost 13% that marked its second-worst showing this year. The sell-off was triggered in part by Alphabet's disclosure that the AI summaries now shown by default on its search engine were affecting the number of advertisements it could sell during the quarter. The sale of ads appearing alongside Google Search results represents the vast majority of the company's business. At first glance, Alphabet's quarterly results appeared solid. Total revenue grew 25% compared with the same period last year, reaching $127.6bn, buoyed by the continued success of Google Cloud, where revenue grew 103% to almost $31bn. However, profits fell by 25% during the quarter, and for only the second time in its history as a public company, Alphabet reported negative free cash flow, this time exceeding $9bn. That is nearly twice the cash loss the company reported three months earlier. Free cash flow represents the money a company retains after paying for operations and investments, meaning Alphabet is now spending more than it brings in, with the new level of outlay almost entirely dedicated to its AI investments. Google CEO Sundar Pichai has publicly backed the company's massive spending on AI. Tracy Woo, a principal analyst at Forrester, said Alphabet's disappointing search business results "highlights the challenge of funding massive AI investments while maintaining the strength of established businesses." Phillip Schindler, Google's chief business officer, had said on Wednesday that he felt "very good about our trajectory" with an AI-focused version of the search engine. Alphabet was not alone in spooking investors this week. Amazon's shares fell 6% in after-hours trading after it reported quarterly sales growth of 11%, reaching $201bn, alongside a negative cash flow figure of $42bn, a six-fold increase in spending over three months. Chief executive Andy Jassy told analysts the company was spending in part because it had the chance at not one but two businesses that could eventually bring in $1 trillion, repeatedly citing its own computer chips and its AI developer platform Bedrock, which gives paying users access to most major AI models and tools. He did not specify which two businesses he meant. "One of the lessons we've learned over 20-plus years is that there is not one tool to rule the world," Jassy said. "People always assume whatever is in the lead early on will be the only thing that people use - it's never true." Asked several times to explain the scale of the spending, he admitted it "would be more convenient" if it were spread over the next 25 years, adding: "That's not the world we live in. We can fund this plan, and I think it will forever change the size, the revenue, the free cash flow of Amazon." Microsoft received a comparatively mild reaction from Wall Street, with shares falling less than 1% on Thursday. The company, one of OpenAI's largest investors, spent around $5bn less on AI-dedicated investments and this week announced plans to cut thousands of workers, further reducing costs. Its revenue grew 19% year on year to $92.3bn for the quarter, while its cloud business grew 30% to $63bn. Microsoft chief executive Satya Nadella said use of Copilot, the company's AI chatbot and tool, had seen "automated tasks nearly double since July" as daily users grew by 500% from a year ago. Analysts suggested investors are increasingly focused on which companies will ultimately profit from the AI race. "Microsoft's results reinforce that enterprise demand for AI remains strong, but they also highlight a much bigger question facing the technology industry, where AI value will ultimately be captured," Woo said.