Investors were thoroughly unimpressed with Alphabet Inc.’s third-quarter earnings on Wednesday evening. Shares tumbled nearly 11% after the company missed sales and profit expectations. It was a sign, Bloomberg News reported, that Wall Street wasn’t satisfied that Google is seeing enough of a return on its artificial-intelligence bets.
As reactions go, it felt harsh, given all the positive signals behind those headline figures.
One catalyst for the selloff was worse-than-expected advertising revenue, with fingers pointed at Google Search ad sales, which came in at $63.35 billion compared with expectations of $64.85 billion. One problem is that as more and more queries now result in the display of an AI Overview, Google’s opportunity to push advertising declines.
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This seems temporary. As with any new digital product, monetization won’t come overnight. Google is still experimenting with different advertising methods within Overviews and is only in the early stages of rolling out monetization internationally.
Not long ago, investors were deeply concerned that people would stop using Google altogether in favor of a competing AI product. Instead, the company has moved quickly to defend its position, and those fears have been largely unfounded. Search-query growth is at its highest in half a decade, the company disclosed on Wednesday. Monetization comes next, and investors need to be patient as the company manages that transition.
If investors feel there isn’t enough evidence that Alphabet’s AI investments are headed in the right direction, they’re not looking hard enough. The app for Gemini — its AI chatbot — now has a billion users and is the company’s fastest-growing product ever. Its frontier AI lab has just put out a new model that outranks all of its competitors, according to Artificial Analysis’ Intelligence Index, a ranking that combines performance across several benchmarks. More than 100 “significant” companies are now building and running AI using Google’s own Tensor Processing Units (TPUs) — an alternative to Nvidia Corp. chips — including Anthropic PBC and Apple Inc.
A far fairer metric of Google’s AI strategy would be its cloud revenue, which rose 103% from the same period last year. And besides, the bigger picture on Google is that its portfolio of AI work has a diversity its competitors can’t match. Between its own work with Android and its partnership to provide the technical backbone to Apple’s improved Siri, Google has a hand in how AI is installed on the vast majority of the world’s smartphones. Its cybersecurity company, Wiz, is at the center of efforts to bolster defenses against vulnerabilities discovered and exploited by AI models. Its Waymo self-driving cars have traveled 300 million miles.
For sure, things could be moving along a little faster. Google’s effort to popularize its own AI agent — a competitor to Meta Platforms Inc.’s Muse — is overly cautious and risks falling flat, for example. But investors should give the company more credit for the foundations it is installing across AI’s many potential use cases, ambitious works in progress that show strong signs of lucratively converging in 2027.
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