A widening gap between queries and revenue
Alphabet's quarterly results fell short across the board, and the search segment drew the most attention. Revenue in search and other grew 12% from a year earlier to roughly $63 billion, but landed below analyst estimates for the second quarter in a row. At the same time, Google reported that query growth on its platform was the strongest in five years.[S1]
That divergence is getting harder to explain away as more users turn to artificial intelligence bots and agents, including products Google itself offers. Since ChatGPT arrived, analysts have argued that conventional search would eventually be overshadowed by AI and that Google would need to find new ways to earn money. Search remains a huge business, but early signals of a shift are emerging.[S1]
Gene Munster of Deepwater Asset Management told CNBC after the report that these new AI-powered services are going to be a force. He said that if personalized bots gain traction, they will become the starting point of commerce for many people, which affects where Google stands.[S1]
Alphabet executives attributed the slowdown in search revenue mainly to foreign exchange, and said the currency effect would be even larger in the fourth quarter.[S1]
Investors react to weaker cash flow and profit
After the disappointing results, the shares fell roughly 10% in after-hours trading. The company also posted negative free cash flow of $9 billion for the quarter, a shortfall three times larger than analysts had projected. For Alphabet, this marked the first time free cash flow went negative since its initial public offering, coming in at $5.9 billion in the second quarter.[S1][S2]
UBS analysts wrote that the results would bring fears about search cannibalization right back to the forefront. Mizuho analyst Jordan Klein said the figures pose a problem for search and YouTube, arguing they heighten concern that AI and agentic tools are taking share from both and damaging the company's AI monetization story.[S1]
Gil Luria of D.A. Davidson said in an email that investors would now worry the shortfall in search, YouTube and subscriptions, which produced a profit miss, indicates AI has finally come for Google. He said he would not jump to conclusions from a single quarter but that the meaning of agentic commerce for Google definitely needs reassessment.[S1]
Cloud and AI spending keep climbing
Alphabet's spending on artificial intelligence is producing clear gains in its cloud unit. That division, which is competing against Amazon Web Services and Microsoft Azure, saw revenue more than double during the quarter, reaching close to $31 billion. Its cloud backlog stood at about $560 billion, a figure reflecting contracted demand for AI infrastructure, and management anticipates that a little over half of that amount will be booked within the coming 24 months.[S1]
Microsoft, reporting after the bell the same day, said Azure revenue rose 48% from a year earlier to $33.2 billion.[S1]
Strong cloud demand is one of the main drivers behind Alphabet's continued spending. The company kept its 2026 full-year capital expenditure guidance at $195 billion to $205 billion and indicated that spending will climb substantially in 2027. Some of that money funds its tensor processing units, which rival Nvidia's graphics chips and only started being offered to outside buyers during the second quarter.[S1]
Customer agreements first appear in Google Cloud's backlog, and the company must build systems before delivering them and booking the revenue. Chief Financial Officer Anat Ashkenazi said on the call that cash goes out while the inventory base is built, and that cash comes in once TPU systems are delivered and customers are billed.[S1]
