Google parent company Alphabet has lost more than $500bn in market value after its latest financial results raised concerns about the impact of artificial intelligence (AI) investments on its core business.
The company’s shares fell nearly 13 per cent on Thursday, hitting a six-month low, after investors reacted to declining profits, negative cash flow and concerns that AI-powered search summaries were affecting advertising revenue.
The sell-off reduced Alphabet’s market value to approximately $3.46tn from $3.97tn the previous day.
Microsoft and Amazon also released their latest financial results this week, highlighting plans to continue spending enormous sums on AI infrastructure and development.
However, investors appeared increasingly concerned about the impact of those investments on the companies’ ability to sustain growth and generate cash.
At first glance, Alphabet’s quarterly results were not particularly disappointing.
The company reported a 25 per cent increase in revenue compared with the previous year, reaching $127.6bn.
Google Cloud was a major contributor to the growth, with revenue increasing by 103 per cent to almost $31bn.
However, Alphabet’s profits fell by 25 per cent during the quarter.
The company also reported negative free cash flow exceeding $9bn, almost twice the amount recorded three months earlier.
Free cash flow represents the money a company retains after paying for operations and investments.
The negative figure indicates that Alphabet spent more money than it generated during the period, with much of the expenditure directed towards AI investments.
Google’s search engine, which now increasingly provides AI-generated summaries of users’ queries, also affected the number of advertisements the company could sell.
Advertising alongside Google Search results remains the largest contributor to Alphabet’s business.
Tracy Woo, a principal analyst at Forrester, said Alphabet’s disappointing search business results “highlights the challenge of funding massive AI investments while maintaining the strength of established businesses.”
Google chief business officer Phillip Schindler said on Wednesday that he felt “very good about our trajectory” with an AI-focused version of the search engine.
However, the company’s shares fell by almost 13 per cent on Thursday, marking its second-lowest performance this year.
Amazon’s shares also fell on Thursday after the company released financial results that disappointed investors.
The stock declined by six per cent in after-hours trading.
Amazon reported quarterly sales growth of 11 per cent, reaching $201bn, but also disclosed a negative cash flow figure of $42bn.
The figure highlighted the company’s substantial spending on investments, with cash outflows increasing six-fold over three months.
Chief executive Andy Jassy said the company was investing because it had the opportunity to develop two businesses that could eventually generate $1tn each in revenue for Amazon.
Jassy did not identify the two businesses specifically.
However, during a call with financial analysts, he repeatedly highlighted the opportunities presented by Amazon’s development and sale of its own computer chips, as well as its AI developer platform, Bedrock.
The platform provides paying users with access to major AI models and tools.
“One of the lessons we’ve learned over 20-plus years is that there is not one tool to rule the world,” Jassy said.
“People always assume whatever is in the lead early on will be the only thing that people use – it’s never true.”
Responding to repeated questions about the company’s spending, Jassy acknowledged that it “would be more convenient” if the investments were spread over the next 25 years.
“That’s not the world we live in,” he added.
“We can fund this plan, and I think it will forever change the size, the revenue, the free cash flow of Amazon.”
Wall Street reacted less negatively to Microsoft’s financial results, with its shares falling by less than one per cent on Thursday.
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The company, one of OpenAI’s largest investors, spent approximately $5bn less on investments dedicated to AI.
Microsoft also announced plans earlier in the week to cut thousands of jobs, a move expected to further reduce its operating costs.
The company’s revenue increased by 19 per cent compared with the previous year, reaching $92.3bn for the quarter.
Its cloud business grew by 30 per cent to $63bn.
Microsoft chief executive Satya Nadella said the use of Copilot, the company’s AI chatbot and productivity tool, had increased significantly.
He said “automated tasks nearly double since July” as daily users grew by 500 per cent compared with the previous year.
Typically, lower spending combined with growing sales would attract a positive reaction from investors.
However, Woo said Wall Street was increasingly looking beyond immediate financial results to determine which companies would ultimately benefit from their AI investments.
“Microsoft’s results reinforce that enterprise demand for AI remains strong, but they also highlight a much bigger question facing the technology industry, where AI value will ultimately be captured,” Woo said.