Alphabet Inc.’s shares fell more than 13%, erasing more than $500 billion in its biggest-ever market plunge, after the company reported disappointing search and advertising sales that reinforced investor concerns about AI’s threat to its core business.

The Google parent reported sales, excluding partner payouts, of $111.2 billion for the third quarter, falling short of analysts’ projections. Ad sales from search and other channels — a business line that accounts for roughly half of overall revenue and is critical to financing the massive AI investments — also missed forecasts, growing at the slowest pace in five quarters.

The results and share reaction “show us the margin for error when a hyperscaler spending hundreds of billions on the AI infrastructure buildout” posts disappointing results in its core business, JPMorgan analysts including Doug Anmuth said in a note.

The shares closed down 12.3% on Thursday at $282.32, wiping roughly $500 billion from Alphabet’s market value. The company’s performance stood in particularly stark contrast to rival Microsoft Corp., which reported growth in its cloud business that surpassed Wall Street’s expectations while keeping its spending in check.

Chief Business Officer Philipp Schindler said in an earnings call with investors late Wednesday that the growing popularity of AI Mode, a new tab in Google Search, took a toll on the company’s results. AI queries have “lower monetization,” Schindler said, though he noted that the company was optimistic and has plans to bring more ads to that part of the search engine.

For years, Google executives have argued that AI chatbots and features won’t cut significantly into its search business. But investors have worried about the impact on the company’s cash cow as consumers turn to rival to ChatGPT, Claude and Google’s own AI features.

The pressure is mounting on Alphabet Chief Executive Officer Sundar Pichai to justify the more than $1 trillion that Google is facing in future payments on resources such as data centers, computing and energy to power his AI ambitions. “This quarter feels like a moment of truth for Alphabet: Either Pichai and his team fix the way the company monetizes AI, or the giant risks losing its leadership in several of its core businesses in the near future,” said Thomas Monteiro, senior analyst at Investing.com.

“Until Google shows it can charge for AI the way it once charged for search ads,” he said, every capital spending forecast it issues is going to “read less like ambition and more like a bill.”

Google’s sprint to build AI infrastructure for both itself and customers has sent the firm’s capital expenditures soaring to record levels. The firm is working to overhaul popular products such as the search engine, YouTube and Gmail with AI. But those efforts have yet to yield the kind of revenue the investors want to see to justify all the spending.

Google’s overall services revenue totaled $96.3 billion in the third quarter, below estimates for $98.4 billion. YouTube advertising sales of $11.2 billion also fell below projections.

In the meantime, Google’s AI bets are getting even more expensive. By the end of the third quarter, Google’s future commitments to buy resources such as computing power and energy totaled $924 billion. Upcoming obligations such as data-center leases that haven’t yet commenced hit $152 billion, bringing the company’s total future obligations to well over $1 trillion.

For the second quarter in a row, the company posted negative free cash flow, something it had, up until now, never seen since going public.

“Search still generates the bulk of Alphabet’s cash, and two straight quarters of negative free cash flow show the pure AI math isn’t working right now,” said Anders Bylund, contributing tech analyst at the Motley Fool.

Alphabet said in July that capital expenditures will reach as much as $205 billion this year, more than double what it spent last year. AI requires massive amounts of computing power, and Google is racing to build data centers so it can meet demand for AI from consumers, businesses and its own employees.

Alphabet’s equity investments also weighed on the company’s bottom line. Those stakes posted an $8.7 billion loss, in large part due to Alphabet’s SpaceX position. That’s a sharp reversal from the gains it saw a year earlier and the windfall in the second quarter that was mainly driven by SpaceX and an investment in a private company that Bloomberg later identified as Anthropic PBC.

Its third-quarter net income was $2.12 a share, falling far below Wall Street’s estimate of $2.99.

One bright spot in the report was Google Cloud, which is seen as a key gauge of demand for the company’s AI products and hosting services. The division reported sales of $30.7 billion and profit of $11.1 billion, surpassing analyst estimates of $29.1 billion in revenue and $9.8 billion in profit. Among the unit’s biggest customers are startups such as Anthropic that compete with Google in the AI race.

“Cloud is booming, but many of its best customers are building assistants that are already beating Google with consumers,” Monteiro wrote. “Right now, Alphabet earns more selling AI to its rivals than using it itself, and that gap should keep growing over the next few quarters unless its models change drastically, and quickly.”

Over the past few years, Google has been working to reinvent its search engine for the AI age, trying to keep consumers in the habit of relying on its answers even as chatbots from OpenAI and Anthropic become more popular. The company now delivers AI-generated answers in response to many searches, a shift that has had major implications for businesses that have traditionally relied on the search giant for traffic and advertising revenue.

Google has worked particularly hard on building an edge by generating more personalized responses to questions, leveraging years of information about its users. In recent months, though, the company has fallen behind Anthropic and OpenAI in developing AI coding tools. Google recently released Gemini 4, which it says excels in areas such as coding and cybersecurity, though some employees fear the company has yet to fully catch up.

Hours before its earnings call, Google announced yet another new AI model known as Carbon, a potential answer to the critics who’ve called for the company to speed up the pace of AI development.

“We have more models coming soon,” Pichai told analysts on the call, “including more efficient versions to help developers optimize for speed and cost and to deploy across our billions of users.”

(With assistance from Mark Bergen and Subrat Patnaik.)

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