Alphabet and Amazon Earnings Under Pressure as Market Stops Rewarding AI Spending

This week, Alphabet and Amazon successively reported quarterly results that disappointed the market. Alphabet's search advertising growth slowed to its lowest level in five quarters, as the introduction of AI Mode is eroding search's monetization capacity; Amazon posted negative free cash flow of $33.5 billion for the quarter, more than four times the negative figure the market had expected, with both its core e-commerce and advertising businesses decelerating. Both companies kept unchanged their full-year capital expenditure plans totaling more than $400 billion.

The market's reaction was immediate: Alphabet's stock plunged more than 11% in a single day, wiping out about $500 billion in market value—the largest single-day drop in its history; Amazon fell as much as 12.5% after hours, giving back all of its gains since the second quarter of this year.

The selloff reflects an increasingly acute contradiction: tech giants are issuing debt and new shares on an unprecedented scale and signing multibillion-dollar data center contracts to pump funding into AI infrastructure, yet the new AI products have not only failed to generate returns commensurate with the investment, but have begun to cannibalize the profitability of their existing businesses. "The market is scratching its head—how does all of this get recouped?" said Dan Morgan, senior portfolio manager at Synovus Trust, after Alphabet's earnings release.

For Alphabet, the contradiction that most unsettled the bulls in this earnings report lay in the gap between two sets of numbers.

CEO Sundar Pichai claimed on the earnings call that Google Search's year-over-year query volume growth was "the highest in the past five years." Yet Search and other revenue grew only 12% to $63.35 billion, a sharp pullback from 16.8% in the second quarter and 19.1% in the first quarter, and also below the buy-side's roughly 14% threshold. In the words of JPMorgan analyst Mark Schilsky, this means "Google is answering more questions than ever, but getting paid less for each one."

Chief Business Officer Philipp Schindler acknowledged on the earnings call that AI Mode has a "lower monetization level," and attributed part of the search revenue slowdown to currency headwinds. That statement put further pressure on the stock. Schindler also said the company is working to bring more ads into AI Mode and remains optimistic about the product's long-term trajectory.

But the market's doubts have not dissipated. Barclays analyst Ross Sandler noted that management is "prioritizing user experience over monetization," that blue-link query growth is slower than total query growth, and that more aggressive agentic search processes next year could widen this gap further—a situation he characterized as a "yellow flag" for investors. Morgan Stanley noted that the gap between Alphabet's search growth and Meta's advertising growth has widened to a recent peak of about 13 percentage points, reinforcing concerns about advertising share migration and AI-driven diversion.

YouTube likewise failed to provide a buffer, with revenue growth of 9.2%, falling below the 10% watch line JPMorgan had previously set. Looking ahead to the fourth quarter, CFO Anat Ashkenazi warned that currency headwinds will widen further, while the search business will also face tough comparisons from the accelerated growth in the third quarter of 2025.

The only bright spot in the earnings report was Google Cloud. Cloud revenue doubled year over year to $30.7 billion, and the segment's operating margin jumped from 23.7% to 36.2%, far exceeding market expectations of about 33%. Cloud backlog reached $561 billion, up 256% year over year, and the company said about 55% will convert into revenue within the next 24 months. Cloud division CEO Thomas Kurian appeared on the earnings call for the first time, seen by the market as a signal of the business's rising strategic status.

However, this strong performance did not fully flow through to group-level profit. Alphabet's total operating profit was $40.6 billion, below the market's $43.2 billion expectation and further below the buy-side's roughly $45 billion threshold. The reason: Alphabet-level shared AI research and development losses widened from $4.5 billion a year earlier to $7.7 billion, and Other Bets lost another $2 billion—by rough estimate, about half of the cloud business's incremental profit was consumed before reaching the consolidated income statement.

According to Bloomberg Intelligence analyst Mandeep Singh:

"During all these transitions, we sometimes focus too much on the cash cow businesses. Given the continued margin expansion in cloud, once Alphabet regains competitiveness in frontier AI models, the combination of cloud and search will be able to bring profitability back to its original level."

Amazon: AWS accelerates, but every dollar earned comes bundled with four dollars of spending

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In the third quarter, the AWS cloud business achieved revenue growth of 39.3% to $46 billion, the fastest pace in nearly five years, and CEO Andy Jassy offered an optimistic forecast of AWS growth "exceeding 40%" in 2027 and 2028. But that was still not enough for the buy side—although the 39.3% growth was above Wall Street's roughly 37% expectation, it fell short of the 42% the buy side had genuinely hoped for. Worse, AWS's operating margin slipped from 39.4% in the second quarter to 38.7%, missing the buy side's expectation of "just over 40%."

In terms of core businesses, growth in advertising services slowed to 11%, the slowest pace since Amazon began disclosing the segment separately; the online retail business grew only 2%, the lowest level in more than three years—a time when people were returning to in-store shopping and the online shopping boom was fading. Amazon partly attributed the advertising slowdown to Prime Day moving from the third quarter to the second, but according to Bloomberg, analysts had already factored this into their forecasts, and the result still fell short of adjusted expectations.

What truly rattled the market was the free cash flow figure. Free cash flow for the third quarter alone was -$33.5 billion, while the Bloomberg consensus estimate was only -$7.7 billion, with actual cash burn more than four times expectations. Behind this were $77.3 billion in capital expenditures for the quarter (up 43% quarter over quarter) and $48.1 billion in newly added long-term debt. Trailing 12-month free cash flow deteriorated sharply from -$7.6 billion in the previous quarter to -$42.4 billion, whereas just a year earlier this figure stood at a historical peak of $52.9 billion.

Debt surges, balance sheet deteriorates across the board

When operating cash flow cannot cover the spending gap, financing becomes the only way out. In the first nine months of this year, Amazon added as much as $115.1 billion in new long-term borrowings, with long-term debt nearly tripling, soaring from $65.6 billion at the end of 2025 to $173.1 billion at the end of September. Cash reserves plunged from $86.8 billion to $55.8 billion, and interest expense more than tripled year over year, rising from $500 million to $1.7 billion.

Alphabet's financing structure has likewise undergone a fundamental shift. In the first three quarters of 2026, Alphabet's share buybacks amounted to zero—compared with $39.8 billion in the same period of 2025. At the same time, the company sold a total of $12.4 billion in new shares through at-the-market offering programs and issued $28.7 billion in senior unsecured notes, with quarterly interest expense soaring from $143 million a year earlier to $967 million. By comparison, in the first three quarters of 2025 Alphabet returned $44.4 billion to investors through financing activities; in the same period of 2026 it raised $115.8 billion net. Notably, the average price at which Alphabet completed its share issuance was about 15% to 20% above the pre-market price—management said the expected return on investment would be "significantly above the cost of capital."

Fourth-quarter guidance also disappointed the market. The midpoint of Amazon's operating profit guidance was $31 billion, below Wall Street's $33 billion expectation and even below the low end of the buy side's $30 billion to $35 billion range. In its post-market commentary, Goldman Sachs characterized several core metrics as "neutral to weak" and expected an initial negative reaction in the stock price.

Market narrative shifts: from rewarding cash burn to demanding returns

Goldman Sachs trader Thales Arruda noted that the market is shifting from "rewarding capex growth" to "demanding evidence of returns," and described the current "pain trade" as hyperscalers underperforming the broader market while de-risked "picks and shovels" names begin to gain traction. JPMorgan characterized Alphabet's earnings as "a setback in the re-ignition of the AI/tech trade."

By contrast, Microsoft's performance provided a counterexample. Microsoft Azure grew 48% in the quarter to $33.2 billion and guided to 49% to 50% growth at constant currency next quarter, while the company maintained a relatively restrained pace of spending. Although dragged down by overall tech stock sentiment, Microsoft shares ultimately closed down 0.2%, but its cloud business's better-than-expected performance made it relatively resilient this earnings season.

Regarding Google Search's predicament, Gene Munster, managing partner at Deepwater Asset Management, pointed out that the company's bigger challenge is building AI agents that can complete purchases on users' behalf and take a commission from them—a business model widely believed in Silicon Valley to be imminent, with the success of Meta's Muse personal assistant already providing a precedent. "The old way was blue links or display ads to influence consumer behavior; the new way is how to influence that bot," Munster said.

Several institutions lowered their Alphabet target prices while maintaining buy ratings, including JPMorgan (from $425 to $375), Morgan Stanley (from $400 to $375), BofA (from $430 to $380) and Barclays (from $425 to $405). Even after the cuts, the median analyst target price is still about 30% above the current market price—meaning Wall Street has not given up on this high-stakes bet, but has begun to raise more questions about the timeline for delivery. Risk disclosure and disclaimer

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