Google shares tumble 9% after $51bn AI outlay deepens cash burn

Google fell sharply after boosting its spending on AI to more than $50bn in the third quarter, leading to a record level of cash burn that spooked investors alongside revenue and profit that missed estimates.

The search giant’s free cash flow fell deeper into negative territory in the three months to the end of September, at minus $9.1bn, compared to minus $5.9bn in the prior period, Google’s parent company Alphabet reported on Wednesday.

Google’s cash burn was much larger than Wall Street had anticipated and marked only the second quarter of negative cash flow since it went public in 2004. The stock fell more than 8 per cent in after-hours trading.

The share price drop, if sustained, would wipe more than $350bn from Google’s market value, the largest single-day loss in the company’s history.

The shift to burning cash has been caused by historic capital expenditure on AI as Google makes an all-in bet on the potential of the nascent technology.

Capex grew to $51.3bn in the quarter, up from $44.9bn in the second quarter. Chief financial officer Anat Ashkenazi has previously said that capex will reach as much as $205bn this year, implying that spending in the fourth quarter could be as high as $73.1bn.

To back the spending spree, Alphabet has taken on tens of billions in debt and in June announced plans to raise about $85bn in its first share sale in more than two decades — a sharp reversal after years of buying back its own shares.

The escalating AI investments came as Google reported weakness in its core search advertising business. Its largest division increased revenue 12 per cent year-on-year to $63.4bn, but missed estimates for $64.9bn.

Group revenue increased 25 per cent to $127.6bn in the quarter, also falling slightly short of the average analyst forecast compiled by FactSet.

Net income fell to $26.2bn compared with the same period a year earlier, missing analysts’ expectations for $37.3bn.

That figure has been affected by changes in the value of Google’s investments, which include a stake in SpaceX. Elon Musk’s rocket maker fell about 4 per cent during the period, contributing to Google’s $8.7bn net loss on equity investments.

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Operating income, which does not include investment losses, rose 30 per cent to $40.6bn, but still missed Wall Street’s expectations for $43.2bn.

Offsetting the gloom in search, Google’s cloud business was again the standout performer. Revenue doubled to $30.7bn from $15.2bn in the same period a year earlier. The division has benefited from surging demand for its own AI services, as well as selling computing capacity to rivals such as start-up Anthropic.

Google has touted its “full-stack” AI strategy, whereby it develops its own chips, data centres, frontier models and delivers them to billions of consumers via its established apps and services.