Alphabet loses $500 billion in stock's worst day ever

Summary

• Alphabet shares fell 13% Thursday, erasing roughly $500 billion in market value, its worst day on record.
• Google Services revenue came in at $96.3 billion, below Wall Street's $98.5 billion expectation, as search growth slowed.
• The selloff dragged on the Nasdaq and sharpened doubts that AI spending is generating matching returns.

The latest

Roughly $500 billion vanished from Alphabet's market value Thursday as the stock fell 13%, its steepest single-day drop ever. The slide followed Wednesday's quarterly report, which showed slowing growth in Google's core advertising engine alongside heavier-than-expected spending. Major U.S. indexes felt the weight, with the Nasdaq composite pulled lower.

Details

• The miss: Google Services, the unit housing search advertising, YouTube and subscriptions, generated $96.3 billion in the quarter, short of the $98.5 billion analysts expected. The shortfall was read as evidence that AI is reshaping how consumers look for information and products.
• The deceleration: Google Search revenue grew 12% year over year in the third quarter, down from 17% in the second quarter and 19% in the first. The three-quarter slide frames the market's reaction as a trend rather than a single bad print.
• The cost side: Alphabet also reported greater-than-expected operating expenses and negative free cash flow, reflecting the price of securing data-center capacity and building new AI models. Wall Street has tolerated Big Tech's AI spending partly because core businesses at Google, Microsoft and Amazon reliably print profits.
• The monetization gap: Chief business officer Philipp Schindler told analysts that strong growth in AI Mode queries weighed on results because those queries monetize at a lower rate than traditional search, even as overall queries grew at their fastest pace in five years. Google is rolling out more ads inside AI Mode globally.
• Early ad results: Google said click-through rates for sponsored product listings in AI Mode are already comparable to those for organic listings, and that its user research indicates people find the ads relevant. The company did not attach revenue figures to those early results.
• Other drags cited: Schindler attributed part of the advertising slowdown to foreign exchange rates, reduced revenue from Asian retailers tied to EU regulatory changes, and a shift of ad spending into the first half of the year driven by the World Cup.
• The analyst read: Mike O'Rourke, chief market strategist at JonesTrading, said one of the companies investing most aggressively in AI to protect its core businesses "showed vulnerability to AI," which he said explains the disappointment. Thursday's drop also completed a death cross, with the 50-day moving average falling below the 200-day, a signal some read as further downside.
• The rivals: OpenAI, which began testing ads with some U.S. ChatGPT users in February, said this summer it was on track for $1 billion in annualized ad revenue, with more than 100,000 advertisers having run campaigns and ads now live in 89 countries.
• The counterpoint: Ad buyers said OpenAI's business remains early-stage. Vic Drabicky, chief executive of January Digital, said brands are funding OpenAI tests with incremental or smaller-channel budgets rather than shifting money out of Google. Andrew Boone of Citizens said enterprise AI use may be pulling some high-spending users toward chatbots.

Background

Google Search has generated hundreds of billions of dollars a year by listing links and charging advertisers per click on sponsored results. AI-powered search bypasses that process with a single direct answer, reducing the need for the paid links that fund the business.

Between the lines

The core tension is structural, not cyclical: the product Google is building to defend search monetizes worse than the product it replaces, and the company is spending record sums to build it. That is why a revenue miss of about $2 billion triggered a $500 billion repricing. Dan Salmon of NewStreet Research said OpenAI's ad momentum is not yet material to Google's revenue but will intensify questions about ads in Gemini.

What's next

NewStreet estimates Alphabet faces headwinds until it restores confidence in search fundamentals and AI monetization, a recovery the firm puts as far out as the first half of 2027. Watch the global rollout of AI Mode ads.

Source: The Wall Street Journal