Alphabet stock drops 10% on negative cash flow while Microsoft rises

Alphabet shares lost approximately 10% in premarket trading on Thursday, October 29, following a report of negative free cash flow for the third quarter. Microsoft stock climbed nearly 4% in the same session as investors compared the financial results of the two technology giants. If Alphabet closes more than 9.77% lower, it will record its steepest decline after an earnings report since its initial public offering in 2004. Nasdaq-100 futures also fell by more than 1% early in the day.

Alphabet reported negative free cash flow of $9.07 billion for the September quarter. This figure exceeded the $2.70 billion shortfall expected by analysts. The company maintained its full-year capital expenditure guidance between $195 billion and $205 billion. In contrast, Microsoft reported capital expenditures and finance leases of $45.2 billion, a 30% increase from the previous year. This amount was lower than the $50.67 billion projected by analysts. Microsoft’s free cash flow decreased by 27% to $18.63 billion, remaining a positive figure.

The divergent results highlight investor scrutiny of artificial intelligence spending and its impact on returns. Search advertising, Alphabet’s primary revenue driver, grew 12% to $63.35 billion in the September quarter. This growth fell short of analyst expectations, adding pressure to the stock price. Philipp Schindler, Alphabet’s chief business officer, stated that the result partly reflected lower monetization within the company’s AI Mode. He noted that Alphabet is currently scaling ads within AI Overviews and AI Mode products, including in international markets.

Ben Barringer, global head of technology research at Quilter Cheviot, described Microsoft’s approach as measured with fewer surprises. He characterized Alphabet’s results as messy and the earnings call as poorly handled. Barringer stated that Google faces an innovator’s dilemma, unsure whether to protect its core business or join the disruption. He added that Google has lost its edge with Gemini and trails peers in agentic AI.

Google’s search business faces headwinds from rival AI chatbots, including OpenAI’s ChatGPT and Anthropic’s Claude. Users may be shifting queries away from Google search engines. Gemini, Alphabet’s own chatbot, has not kept pace with these competitors.

The market reaction on Thursday reflects the ongoing assessment of how massive AI investments translate into shareholder value. Alphabet’s negative cash flow marks a sharp departure from its historical performance. Microsoft’s positive, though reduced, cash flow provided a counterpoint to the tech sector's spending cycle.

Alphabet and Microsoft will continue to operate under their respective capital expenditure plans. The companies’ next scheduled financial updates will provide further data on their AI spending and revenue trends.