Alphabet shares fall after revenue miss, cash burn worsens

Oct 28 (Reuters) - Google parent Alphabet on Wednesday missed Wall Street revenue expectations as heavy AI spending accelerated its cash burn, sending its shares down about 8% in extended trading.

The tech giant reported negative free cash flow of $9.07 billion, compared with analyst expectations that it would come close to breaking even, according to data compiled by LSEG.

That represented an increase from the $5.9 billion burn in the prior quarter and the first time the company went into the negative in its 22-year history as a public company.

Alphabet's ballooning losses were driven by spending to boost cloud capacity and fund AI research. It reported a $7.66 billion operating income loss in "Alphabet-level activities," which it said primarily reflected expenses related to AI research and development.

The tech giant's total revenue for the third quarter was $127.6 billion, short of analysts' estimate of $128.2 billion, according to LSEG data.

The revenue miss was caused by Google's core advertising business that reported $82.01 billion in revenue, about $1.41 billion short of expectations.

Revenue at Google Cloud exceeded estimates and more than doubled to $30.71 billion in the third quarter ended September 30, but was not enough to make up for the ad-side performance.

The third-largest cloud services provider globally, behind Amazon Web Services and Microsoft's Azure, has continued to expand enterprise commitments, supported by multi-year cloud and AI infrastructure deals across cybersecurity, retail and financial services.

The results underscore Alphabet's position as the primary beneficiary of surging enterprise AI spending, easing investor concerns that heavy capital expenditures on computing capacity might outpace near-term revenue gains.

Enterprise appetite for cloud-based AI training and inferencing has remained strong through the year, keeping data center utilization high and pushing major cloud providers to accelerate infrastructure deployment.

Alphabet, Microsoft, Amazon, and Meta are projected to collectively spend well over $700 billion in 2026 to expand AI data-center footprint, chips and high-performance networking capacity.

Google Cloud's outperformance comes as hyperscalers navigate varying degrees of capacity constraints, positioning Alphabet well to capture market share among enterprises migrating AI workloads to the cloud.

While industry-wide supply bottlenecks for advanced silicon and data-center power have persisted, Alphabet's investments in custom tensor processing units alongside third-party GPUs have helped expand its service delivery capabilities.

Alphabet's proprietary AI initiatives also provided a tailwind and adoption of its Gemini model suite broadened across enterprise software and developer platforms in the reported quarter.

The company's integration with Apple's ecosystem to power cloud-based AI capabilities has continued to support Alphabet's wider ecosystem reach.

(Reporting by Akash Sriram in Bengaluru and Kenrick Cai in San Francisco; Editing by Pooja Desai and Deepa Babington)