Google value plunges by $500bn as it admits AI search is hitting its ad sales

Google parent Alphabet lost just over $500bn (£374bn) in value on Thursday after it rattled Wall Street with its last update of the year on its business operations.

Google spooked investors so badly that its stock hit a six-month low, after it revealed its artificial intelligence (AI) summaries on search were affecting ad revenue.

Microsoft and Amazon also updated investors this week, and joined Google in plans to keep spending astronomical sums of cash in an ongoing AI race.

But investors appeared dismayed at the impacts these plans are having on the ability of each to keep growing their core lines of business.

At first glance, the quarterly results of Alphabet, the parent company of Google, were not at all bad.

Total revenue grew 25% compared to last year, hitting $127.6bn. It was buoyed by the ongoing success of Google Cloud, where revenue grew by 103% to almost $31bn.

However, profits at the company fell by a considerable 25% during the quarter. And for the second time in its history as a public company, it showed negative free cash flow, this time in excess of $9bn. That's almost twice the loss of cash Alphabet showed just three months ago.

Cash flow represents the money a company retains after paying for operations and investments, meaning Alphabet is now spending more money than it is bringing in. That new level of spending is almost entirely dedicated to Google's AI investments.

By the end of Thursday, the company's total stock market value had fallen to $3.46 trillion from $3.97 trillion the day before.

Google's omnipresent search engine now defaults to AI summaries of a person's query, and that hit the number of advertisements it was able to sell during the quarter.

The sale of ads that appear alongside Google Search results is the vast majority of 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."

Although Phillip Schindler, Google's chief business officer, said on Wednesday that he felt "very good about our trajectory" with an AI-focused version of the search engine, the company's stock fell by almost 13% on Thursday, its second lowest showing this year.

Amazon's stock also took a hit on Thursday after it shared results that disappointed investors. Shares of the company fell 6% in after hours stock trading.

Alongside quarterly sales growth of 11%, hitting $201bn, the company shared a staggering cash flow figure of negative $42bn.

That number shows that Amazon is not only spending more money than it makes, but that spending has increased six-fold over the span of three months.

Chief executive Andy Jassy claimed the business was spending in part because it had the chance at, not one, but two businesses that could end up bringing in $1 trillion for Amazon the future.

Jassy did not specify what two Amazon businesses those may be. But during a call with financial analysts he repeatedly mentioned the financial opportunity presented by Amazon making and selling its own computer chips, as well as its AI developer platform Bedrock, which offers paying users access to most 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."

As Jassy was asked several times to explain the company's spending, he admitted it "would be more convenient" if it 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 enthusiastically to Microsoft's update, with shares falling by less than 1% on Thursday.

The company, which is also one of OpenAI's largest investors, spent around $5bn less on investments dedicated to AI. It also revealed earlier this week plans to cut thousands of workers, which will further reduce the company's costs.

Meanwhile, its revenue grew 19% from a year earlier, hitting $92.3bn for the quarter. Its crucial cloud business grew by 30% to $63bn.

Chief executive Satya Nadella said the use of Copilot, Microsoft's AI chatbot and tool, has seen "automated tasks nearly double since July" as daily users grew by 500% from a year ago.

Usually lower spending and growing sales earns a positive reaction from investors.

But Woo said Wall Street is trying to look farther into the future when it comes to which businesses will truly make good on their big promises around AI.

"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.