Alphabet stock plunges 12% as AI Mode slows ad revenue growth

Alphabet has been pivoting headfirst into AI, and that shift is now showing up in its financials. The company said AI Mode's strong growth contributed to a deceleration in revenue growth because it makes less ad money on AI than on traditional search. The stock plunged 12% on Thursday, shedding nearly $500 billion, a sharp market reaction to the idea that the core search advertising business—foundational to Google's $3 trillion valuation—may be under threat from the company's own AI products.

Despite that, Google is framing the lost revenue from cannibalization as just another form of AI investment in a vision it expects to prevail. CEO Sundar Pichai said AI investments helped lead to the company's fastest search query growth in five years, describing it as Google being like a startup again, with usage trumping revenue. Chief business officer Philipp Schindler added that the majority of AI Mode queries are incremental, creating more monetization opportunities over time, and that user research shows people are comfortable with ads on these surfaces and find them highly relevant.

When asked about the potential for AI agents to eat into search revenues, Pichai offered a similar argument, calling it an expansion opportunity, just like a few years ago when incorporating AI chat use cases in search allowed people to ask more and do more in search. The coming quarters will show whether that usage growth translates into the ad dollars investors are watching for, or whether the cannibalization continues to weigh on revenue.