Search grew but fell short of hopes
The 12% rise in search and other revenue to roughly $63 billion missed forecasts again, and growth slowed from 19% in Q1 to 17% in Q2 to 12% in Q3. That came even as Google said search queries grew at the fastest pace in five years.
Executives said foreign exchange was the main reason growth cooled and warned currency effects will be bigger in Q4. Analysts see something else at play too. UBS said the report brings search cannibalization worries back to the surface.
Mizuho's Jordan Klein flagged pressure on both Search and YouTube from AI and agentic systems. D.A. Davidson's Gil Luria added, "Investors will now worry that the miss in Search, YouTube and Subscription, leading to a profit miss, are an indication that AI has finally come for Google," while cautioning not to draw conclusions from one quarter.
AI is changing how people find things and how Google sells ads
More people are turning to AI bots and agents, including ones from Google, which could divert activity from traditional search. "These things are going to be a force," Deepwater Asset Management's Gene Munster told CNBC's "Fast Money," adding that personalized bots could become "the starting point of commerce."
Alphabet says AI is also lifting ads. "We continue to accelerate the deployment of Gemini models across our entire ads infrastructure to boost performance," Chief Business Officer Philipp Schindler said, characterizing it as the most significant overhaul of product listing ads in a decade and noting that AI drives most product launches. In Q3, Gemini models helped advertisers produce over 1.5 billion campaign assets, more than seven times last year. The company also says Gemini strengthens core ads by better gauging user intent and making ad placements more relevant.
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Cash flow, cloud, and the heavy cost of building AI
The quarter's cash burn reflects the price of building AI infrastructure. Free cash flow came in at negative $9 billion, about three times the anticipated deficit, after a negative $5.9 billion in Q2, the first time as a public company that figure dipped below zero. The stock dropped roughly 10% in late trading on the earnings miss and the cash outflow.
Cloud is where the AI investment is landing in revenue. Google Cloud revenue reached nearly $31 billion, exceeding double last year's level in the quarter, and backlog climbed to about $560 billion, signaling hefty committed demand for AI capacity. Management expects a little over half of that backlog to convert within the next two years. Alphabet kept its 2026 capex outlook at $195 billion-$205 billion, projecting that spending will rise significantly in 2027. Part of that budget is set aside for Google's TPUs - the company's tensor processing unit chips - which compete with Nvidia's graphics processors. Alphabet began selling TPUs to external customers in Q2, and in November 2025 it rolled out its seventh generation, Ironwood, a decade after its first custom AI chip in 2015.
Cloud customers sign contracts that first show up in backlog, and Alphabet must build the systems ahead of delivery and revenue recognition. "You see cash going out and we're building up the inventory base," CFO Anat Ashkenazi said. "As we start delivering and billing customers for these TPU systems, then you see cash coming in." For industry context, Microsoft said Azure revenue increased 48% year over year to $33.2 billion.
What this means for your portfolio
You are watching a handoff in real time: search growth decelerating while cloud and AI drive big, contracted demand that takes cash now and shows up in revenue later. Management says AI is improving ad performance today and enterprise customers are buying Gemini-powered services.
The spending roadmap explains the cash picture. With a 2026 capex plan of $195 billion to $205 billion alongside even higher spending in 2027, and a cloud backlog near $560 billion that management says will turn a bit over half into revenue within two years, the stage is set for building before billing. Also note the company pinned some search deceleration on currency, with a bigger hit expected in Q4.
The bottom line: investors are weighing near term cash strain and softer search growth against accelerating AI rollouts and a swelling cloud order book. How quickly backlog turns into delivered systems and billed revenue will be the next catalyst to watch.
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