Alphabet Misses Estimates as Search Revenue Growth Slows Despite Record Query Volume

Alphabet reported third-quarter earnings that missed expectations across the board, and the weakest spot was its most important one: search. Shares fell about 10% in extended trading after the report.

Revenue in the search and other segment rose 12% from a year earlier to roughly $63 billion, below analyst estimates for the second consecutive quarter. Growth in the segment has slowed from 19% in the first quarter to 17% in the second, and then to 12% in the third. Google said, however, that search query growth was the strongest in five years.

That gap between usage and revenue is getting harder to ignore as more people turn to AI bots and agents, including those Google itself offers. Analysts have long predicted that traditional search could be eclipsed by AI and that Google would need new ways to make money. Alphabet executives said foreign exchange was the largest factor behind the slowdown and that the currency effect would be even bigger in the fourth quarter.

Investors also reacted to negative free cash flow of $9 billion for the quarter, three times the deficit analysts had estimated. In the second quarter, free cash flow turned negative for the first time since Alphabet went public, at $5.9 billion.

Analysts said the results revive a familiar worry. UBS wrote that they are "going to bring Search cannibalization fears right back to the forefront." Mizuho analyst Jordan Klein said the numbers raise "the fear around AI and agentic taking share from Search and YT and hurting their AI monetization narrative." Gene Munster of Deepwater Asset Management told CNBC's "Fast Money" that if personalized bots take off, they could become the starting point of commerce for many people, which affects Google's position.

Google says its Gemini models are strengthening the ads business by improving its grasp of user intent and making ads more relevant. Chief Business Officer Philipp Schindler said the company made its "biggest update to product listing ads in a decade" during the quarter. He added that Gemini models helped advertisers generate more than 1.5 billion campaign assets, up more than sevenfold from a year earlier.

The bright spot was cloud. Revenue in Google Cloud more than doubled to nearly $31 billion, and backlog reached roughly $560 billion. Management expects just over half of that backlog to be recognized over the next 24 months. Microsoft, which also reported Wednesday after the market close, said Azure revenue rose 48% to $33.2 billion.

Strong cloud demand underpins Alphabet's heavy spending. The company kept its full-year 2026 capital expenditure forecast at $195 billion to $205 billion and said spending will rise significantly in 2027. Part of that goes toward tensor processing units, which compete with Nvidia's graphics chips and which Alphabet began selling to outside customers in the second quarter. CFO Anat Ashkenazi said cash will start coming in once those systems are delivered and billed.

Gil Luria of D.A. Davidson said investors may now fear that "AI has finally come for Google," but cautioned against rushing to conclusions based on one quarter. He said the company will need to reassess what agentic commerce means for Google.