Google admits AI search earns less, plans more ads

Google parent Alphabet released its Q3 financial results, showing strong revenue growth for the months of July through September, yet the company's stock price suffered one of its largest post-earnings drops in history. The slump stems from several troubling disclosures in the report, notably the admission that AI-powered search generates less revenue than traditional web search, alongside plans to pump even more capital into artificial intelligence next year.

• Alphabet brought in nearly $128 billion in Q3, with net income exceeding $26 billion, though net income was nearly $9 billion lower year-over-year.
• Each AI Mode query generates less revenue compared to a standard web search due to fewer ads and lower ad costs.
• Negative cash flow ballooned from -$5.8 billion to -$9.06 billion driven by runaway AI capital expenditures.
• Google plans to expand contextual ads in AI Mode internationally, while rolling out multi-turn ads in the US market.

Market reaction and financial performance

Financial markets were unimpressed with the earnings report despite a 25 percent revenue increase compared to last year. Google reported earnings per share of $2.12, falling short of the $3.02 analyst consensus projection. As a result, the stock price plunged by nearly 12 percent. On a positive note, Google’s Cloud products outperformed expectations, generating over $30 billion in revenue—about a billion higher than analyst estimates.

Challenges with AI search monetization

Google's strategy over recent years has centered heavily on artificial intelligence, highlighted by the transition to an AI search platform powered by Gemini models. During the earnings call, Chief Business Officer Philipp Schindler addressed search metrics, noting that search growth slowed down compared to previous quarters. Furthermore, Schindler admitted that AI Mode queries pull in less revenue than traditional web searches. Although Google's research suggests users find AI ads more helpful, advertisers need time to fully understand their value.

Expanding ad strategy and massive AI spending

To combat lower search monetization, Google announced an expansion of contextual advertising within AI Mode. In the US, the company is introducing multi-turn ads that continuously adapt as users engage in back-and-forth interactions with the search chatbot. Meanwhile, Google continues to accelerate its AI spending, posting capital expenditures of $51.4 billion in Q3 and projecting total AI investments to exceed $300 billion by 2027. While robust cloud revenues help offset these costs, slowing search growth combined with skyrocketing AI expenditures highlights potential financial risks if market conditions shift.