Alphabet shares drop 10% in premarket after negative cash flow

Alphabet stock fell 10 percent in premarket trading on Thursday, positioning the company for its largest decline following an earnings report since going public in 2004. The drop occurred as investors analyzed the third-quarter financial results of major technology firms. Microsoft shares moved in the opposite direction, rising nearly 4 percent during the same period.

The divergence in stock prices centered on how each company managed its capital expenditures and cash flow. Microsoft reported capital expenditures and finance leases totaling $45.2 billion for the third quarter. This figure represented a 30 percent increase from the previous year but came in below the $50.67 billion expected by analysts. The company's free cash flow decreased by 27 percent to $18.63 billion, remaining a positive amount.

Alphabet presented a different financial picture. The company reported negative free cash flow of $9.07 billion for the third quarter. Analysts had projected a negative figure of $2.70 billion, meaning Alphabet's result fell much further below expectations. The company maintained its guidance for full-year capital expenditure between $195 billion and $205 billion.

Search advertising, Alphabet's primary revenue source, grew 12 percent in the September quarter to $63.35 billion. Despite this growth, the figure missed analyst expectations, adding pressure to the shares. Philipp Schindler, Alphabet's chief business officer, attributed the impact to lower monetization within the company's AI Mode. He noted that Alphabet is now scaling ads within its 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, noting that the company contains fewer surprises. He characterized Alphabet's results as messy and stated that the poorly handled earnings call contributed to the share price drop. Barringer suggested that Alphabet faces an innovator's dilemma, unsure whether to protect its core business or join the disruption, which has left the company behind peers on agentic AI.

Google's search business has faced headwinds from the rise of other AI chatbots, such as OpenAI's ChatGPT and Anthropic's Claude. Users may be performing more search queries outside of Google, and the company's own Gemini chatbot has not kept pace with competitors. Nasdaq-100 futures were down more than 1 percent early in Thursday's trading session.

If Alphabet closes more than 9.77 percent lower on Thursday, it will record its worst post-earnings reaction in its history. Investors continue to scrutinize AI spending plans across the tech sector, focusing on the returns generated by those investments.