Market reaction
Alphabet fell 13% shortly after the open, whereas Microsoft barely moved. Should Alphabet finish the session down by over 9.77%, that would mark the largest post-earnings decline since it went public.
Investors zeroed in on how much each company spent and how much cash they generated, with very different takes for the two tech giants.
Spending and cash flow
Microsoft said third quarter capital spending plus finance leases totaled $45.2 billion, up 30% from a year earlier, but short of the $50.67 billion analysts were looking for. Free cash flow declined 27 percent to $18.63 billion and remained in the black.
Alphabet, by contrast, posted free cash flow of negative $9.07 billion for the period, far undershooting the $2.70 billion analysts had projected. The Google parent kept its full year capital expenditure outlook unchanged at a range of $195 billion to $205 billion.
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Search, AI, and the earnings call
The numbers landed as investors weigh AI buildouts against near term cash returns. Ben Barringer, Quilter Cheviot's global technology research lead, said, "Microsoft is building out its architecture in a measured way and as such contains fewer surprises," "Alphabet, by contrast, saw its share price hit after hours as a result of a fairly messy set of results and a poorly handled earnings call."
Search ads, the company's largest revenue stream, rose 12 percent during the September quarter to $63.35 billion, yet still came in below forecasts and weighed on the stock. Chief business officer Philipp Schindler said search was partly pressured by weaker monetization in the company's AI Mode, and added that Alphabet is now "scaling" advertising inside its AI Overviews and AI Mode offerings, with rollout extending to international markets.
Google's search business has encountered challenges as people experiment with alternative AI chatbots such as OpenAI's ChatGPT and Anthropic's Claude, meaning some queries may be happening outside Google. "The problem for Google is it faces an innovator's dilemma and doesn't know whether to protect its core business or look to join the disruption. As such, Google has lost its edge with Gemini and is behind peers on agentic AI," Barringer said.
What this means for your portfolio
In plain English: markets are rewarding AI investment that still throws off cash, and punishing spend that drains it. Microsoft lifted outlays but stayed cash generative. Alphabet's deeper than expected cash burn, plus softer search monetization, put it on the defensive.
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