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# Alphabet sinks after a rare miss: AI Mode searches pay less, and cash flow is negative again
- URL: https://www.skimwire.com/alphabet-q3-2026-earnings-ai-mode-search-free-cash-flow/
- Published: 2026-10-29T12:48:53.000Z
- Updated: 2026-10-29T20:05:03.000Z
- Description: Revenue rose 25% and Google Cloud doubled, but search grew slower than expected and free cash flow hit minus $9.1 billion. Shares fell 11% premarket.
- Author: Jeremy Moon
- Tags: Business, AI

## The skim

- Alphabet's third-quarter revenue rose 25% to $127.6 billion, but it missed Wall Street's revenue and profit estimates for the first time in nearly four years, CNBC reports. Shares fell more than 10% after hours Wednesday and were down about 11% in premarket trading Thursday. Update, Oct. 29: Alphabet's Class A shares closed down 12.6% at $283.82 in regular trading Thursday, according to CNBC market data.
- Google Cloud more than doubled to $30.7 billion. Search grew 12%, slower than expected, and Google said part of the reason is that AI Mode searches earn less than regular ones so far.
- Free cash flow was negative $9.1 billion after $51.4 billion in capital spending. Alphabet kept its 2026 capex forecast of $195 billion to $205 billion and said 2027 will be "significantly" higher.

## What Alphabet reported

In its [earnings release](https://s206.q4cdn.com/479360582/files/doc%5Ffinancials/2026/q3/2026q3-alphabet-earnings-release.pdf?ref=skimwire.com) on Wednesday, Alphabet reported revenue of $127.6 billion for the quarter ended Sept. 30, up 25% from a year earlier. Operating income rose 30% to $40.6 billion. Net income fell to $26.2 billion, or $2.12 a share, from $35.0 billion, mostly because of an $8.2 billion loss in other income. A year ago that line was a $12.8 billion gain. According to [CNBC](https://www.cnbc.com/2026/10/28/alphabet-googl-earnings-q3-2026.html?ref=skimwire.com), that loss came from its equity holdings, which include stakes in SpaceX and Anthropic.

Analysts polled by LSEG expected $128.22 billion in revenue and $3.02 in adjusted earnings per share. Alphabet delivered $127.58 billion and $2.67\. Google Cloud was the bright spot. Its revenue rose 103% to $30.7 billion, ahead of the $28.7 billion analysts expected, and Alphabet said sales of its TPU systems were "a meaningful contributor." Search and other revenue grew 12% to $63.35 billion, short of the $64.96 billion estimate. YouTube ads rose 9% to $11.2 billion.

## Why it matters

This is the quarter investors have been nervous about. Google says its AI features are bringing more searches. CEO Sundar Pichai said query growth is "the highest it's been in the last five years." But those searches aren't paying as well yet. On the earnings call, chief business officer Philipp Schindler named "lower monetization we were seeing in AI Mode" as one reason search revenue grew more slowly, [The Register](https://www.theregister.com/ai-and-ml/2026/10/29/google-struggling-to-make-ai-mode-searches-pay/5306181?ref=skimwire.com) reports. Currency moves and weaker retail and media spending also weighed on it, according to [Search Engine Journal](https://www.searchenginejournal.com/google-search-growth-slows-again-ai-mode/594862/?ref=skimwire.com). Schindler argued the payoff will come because most AI Mode queries are "incremental, creating more monetization opportunities over time." On Wednesday Google expanded AI Mode ads to 10 more countries.

The other worry is cash. Alphabet spent $51.4 billion on property and equipment in the quarter, and its free cash flow was negative for the second quarter in a row. It was minus $9.1 billion, after minus $5.9 billion in the second quarter. Long-term debt rose to $125.1 billion from $21.6 billion a year earlier, CNBC notes. "We continue to expect our capex to increase significantly in 2027, and will provide further details on our Q4 call," CFO Anat Ashkenazi said.

The AI business is getting bigger. Alphabet says the Gemini app has reached one billion users. Its model APIs now handle nearly 32 billion tokens per minute, and Google announced [Gemini 4 Carbon](https://www.skimwire.com/google-gemini-4-carbon-cybersecurity-model/) the same day. Cloud demand is strong enough that Google is renting some capacity from third parties, The Register notes, and this week [Oracle said it will offer Google TPUs](https://www.skimwire.com/oracle-google-tpus-openai-reportedly-buying/) in its own cloud. "The cloud business was the only business that beat," Jefferies analyst Brent Thill told CNBC.

## What's next

For people who use Google, more ads are coming inside AI answers. Google is turning on ads in AI Mode follow-up questions in the U.S. and plans more countries, including the U.K., in the fourth quarter. For investors, the next test is the 2027 spending number Alphabet promised for its fourth-quarter call. Whether AI Mode starts to earn as much as classic search will shape how that number is received.

*Sources:* [*Alphabet*](https://s206.q4cdn.com/479360582/files/doc%5Ffinancials/2026/q3/2026q3-alphabet-earnings-release.pdf?ref=skimwire.com)*,* [*CNBC*](https://www.cnbc.com/2026/10/28/alphabet-googl-earnings-q3-2026.html?ref=skimwire.com)*,* [*The Register*](https://www.theregister.com/ai-and-ml/2026/10/29/google-struggling-to-make-ai-mode-searches-pay/5306181?ref=skimwire.com) *and* [*Search Engine Journal*](https://www.searchenginejournal.com/google-search-growth-slows-again-ai-mode/594862/?ref=skimwire.com)*.*