Google value plunges by $500bn as AI fears rattle Wall Street
Google spooked investors so badly that its stock hit a six-month low, after it revealed its AI search summaries were affecting ad revenue.
Google value plunges by $500bn as AI fears rattle Wall Street
Google CEO Sundar Pichai has defended the company’s huge spending on AI.
Alphabet, Google’s parent company, shed just over $500bn (£374bn) in value on Thursday after unsettling Wall Street with its final business update of the year.
Google alarmed investors so much that its shares dropped to a six-month low after it disclosed that its artificial intelligence (AI) summaries in search were hurting ad revenue.
Microsoft and Amazon also reported to investors this week, and both joined Google in planning to keep pouring enormous sums of money into the continuing AI race.
But investors seemed unhappy about the effect these plans are having on each company’s ability to keep expanding its core businesses.
At first glance, Alphabet’s quarterly figures were far from poor.
Total revenue rose 25% from a year earlier to $127.6bn. The result was helped by continued strength at Google Cloud, where revenue jumped 103% to nearly $31bn.
Even so, the company’s profits fell by 25% over the quarter. And for only the second time since becoming a public company, it posted negative free cash flow, this time of more than $9bn. That is almost double the cash loss Alphabet reported just three months earlier.
Cash flow is the money a company keeps after paying for operations and investments, which means Alphabet is now spending more than it is taking in. That higher spending is being directed almost entirely toward Google’s AI investments.
By the end of Thursday, the company’s total market value had dropped to $3.46 trillion from $3.97 trillion the previous day.
Advertising sold alongside Google Search results makes up the overwhelming majority of Alphabet’s business.
Tracy Woo, a principal analyst at Forrester, said Alphabet’s weak search business performance “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-worst performance this year.
Amazon’s shares also fell on Thursday after it released results that disappointed investors. The stock dropped 6% in after-hours trading.
Along with quarterly sales growth of 11%, reaching $201bn, the company reported a striking cash flow figure of negative $42bn.
That figure shows Amazon is not only spending more than it earns, but that spending has risen six-fold over the past three months.
Chief executive Andy Jassey said the company was spending partly because it sees the possibility of not one, but two businesses that could each eventually generate $1 trillion for Amazon in the future.
“There has never been a trillion dollar revenue business, and we may have two of them in the next 5-10 years.”
Jassy did not say which two Amazon businesses those might be.
Wall Street responded less warmly to Microsoft’s update, with shares slipping by less than 1% on Thursday.
The company, which is also one of OpenAI’s biggest investors, spent about $5bn less on investments tied to AI. It also announced earlier this week plans to cut thousands of workers, which will further lower its costs.
Meanwhile, revenue increased 19% from a year earlier to $92.3bn for the quarter. Its key cloud business grew 30% to $63bn.
Chief executive Satya Nadella said use of Copilot, Microsoft’s AI chatbot and tool, has seen “automated tasks nearly double since July” as daily users rose by 500% from a year ago.
Normally, lower spending and rising sales would be rewarded by investors.
But Woo said Wall Street is looking further ahead at which businesses will actually deliver on their big AI promises.
“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.