Alphabet shares fell almost 10% in after-hours trading, even though Google Cloud revenue more than doubled in the third quarter.
Cloud revenue rose 103% to $30.7 billion, against expectations of $29.1 billion and growth of 82% in the previous quarter.
Cloud operating income was $11.1 billion, a margin of 36.2%, against forecasts of $9.8 billion and 32.5%.
Alphabet credited AI infrastructure, core cloud services and a meaningful contribution from sales of tensor processing unit (TPU) systems, its custom AI chips. That came ahead of management's "mostly 2027" timing for TPU revenue.
Where it fell short
Group revenue rose 25% to $127.6 billion, in line with the $128.0 billion analysts expected.
Operating income was $40.6 billion, a margin of 31.8%, below the $43.2 billion and 33.7% expected.
Earnings were $2.12 a share against a forecast of $2.99. An $8.2 billion loss on the value of investment securities accounts for the gap, compared with a $12.8 billion gain a year earlier.
Search and other revenue rose 12% to $63.4 billion, below the $64.9 billion expected. YouTube advertising rose 9% to $11.2 billion, against $11.4 billion expected.
Chief executive Sundar Pichai cited the fastest Search query growth in five years and said the Gemini app has passed one billion users.
Spending and funding
Capital spending was $51.4 billion, up 114% but below the $55.8 billion expected.
Free cash flow was negative $9.1 billion, against a forecast of negative $3.5 billion.
Alphabet funded the build with $12.4 billion of equity sold into the market and $28.7 billion of notes. It still ended the quarter with $265 billion of cash and securities against $125 billion of debt.
Broker view
Yorkville Ives, the US broker led by Dan Ives, calls it the cloud result it has been waiting for.
It says the Search shortfall reflects monetisation lagging query growth as AI Mode scales, not cannibalisation.
It keeps its Outperform rating and $400 price target, against a price of $320.58 in its note.
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