Alphabet search revenue up 12% to roughly $63 billion, misses again

Alphabet's latest earnings report marks a notable shift in the narrative around AI and search. For years, analysts warned that traditional search would eventually be eclipsed by AI chatbots and agents, but the impact on Google's revenue had been largely theoretical. Now, the company's search and other segment grew 12% to roughly $63 billion yet still fell short of estimates for the second consecutive quarter, even as search query growth reached its strongest level in five years. That divergence between usage and revenue is what caught investors' attention, and the stock's roughly 13% drop on Thursday—the steepest on record—suggests the market is taking the threat seriously.

The earnings report also showed negative free cash flow of $9 billion for the quarter, three times the estimated deficit, following a negative $5.9 billion in the second quarter, which was the first such occurrence in Alphabet's history as a public company. Meanwhile, the cloud division provided a counterpoint: revenue more than doubled to nearly $31 billion, and backlog reached roughly $560 billion, reflecting strong contracted demand for AI infrastructure. Alphabet maintained its full-year 2026 capital expenditure forecast of $195 billion to $205 billion and said spending will increase significantly in 2027.

Analysts are now reassessing what the rise of AI agents means for Google's core advertising business. The gap between search query growth and revenue growth may signal that AI tools are beginning to cannibalize search monetization, a concern that had been dismissed in previous quarters. Whether this is a one-quarter anomaly or the start of a longer trend remains to be seen, but the report has clearly brought the issue back to the forefront for investors.