Alphabet shares dropped more than 10 per cent in after-hours trading after the Google parent missed Wall Street expectations and warned that its enormous artificial intelligence investment program would continue putting pressure on cash flow.

The technology giant reported negative free cash flow of US$9.07 billion, equivalent to about A$12.9 billion, for the third quarter. Analysts had expected the company to come close to breaking even.

The result marked a further deterioration from the previous quarter, when Alphabet recorded negative free cash flow of US$5.9 billion, or about A$8.4 billion. That quarter was the first time the company had moved into negative free cash flow during its 22 years as a publicly listed business.

Chief Financial Officer Anat Ashkenazi told investors capital expenditure would rise substantially in 2027 as Alphabet continues building the infrastructure required to support its AI operations.

She also warned that margins could face near-term pressure as the company relies on third-party cloud capacity while expanding its own computing infrastructure.

Alphabet reported third-quarter revenue of US$127.6 billion, or approximately A$181.6 billion, missing analysts’ forecast of US$128.2 billion, equivalent to around A$182.4 billion.

The shortfall was partly driven by Google’s core advertising operation, which generated US$82.01 billion, or roughly A$116.7 billion, in revenue. That was about US$1.41 billion, or A$2 billion, below expectations.

Net income available to common shareholders fell 25 per cent to US$26.17 billion, approximately A$37.2 billion.

Adjusted earnings per share came in at US$2.67, or around A$3.80, compared with Wall Street expectations of US$3.02, equivalent to about A$4.30.

Alphabet’s rising expenditure reflects the enormous sums being committed to AI infrastructure, including data centres, custom processors, graphics chips and research.

The company reported a US$7.66 billion, or about A$10.9 billion, operating loss from “Alphabet-level activities”, which it said was primarily driven by AI research and development expenses.

Despite the weaker overall result, Google Cloud continued to expand rapidly.

Cloud revenue more than doubled to US$30.71 billion, equivalent to approximately A$43.7 billion, beating analyst expectations and highlighting the increasing importance of the enterprise business to Alphabet.

Google Cloud chief Thomas Kurian also appeared on the company’s earnings call, reflecting the division’s growing role within a business traditionally dominated by consumer services and advertising.

Kurian said sales of Google’s tensor processing units, which compete with Nvidia’s graphics processors in AI workloads, had become a meaningful contributor to the cloud division.

Alphabet has continued signing multi-year cloud and AI infrastructure agreements across industries including financial services, retail and cybersecurity.

The company also sought to reinforce its position in the AI race by unveiling its Gemini 4 Carbon model ahead of the earnings announcement.

Chief Executive Sundar Pichai told investors the new model demonstrated Google was again operating at the forefront of AI development.

However, the financial cost of competing in AI remains substantial.

Alphabet, Microsoft, Amazon and Meta are expected to collectively spend more than US$700 billion, or about A$996 billion, during 2026 as they increase investment in data centres, chips and high-performance networking infrastructure.

The challenge for Alphabet is now balancing that spending with investor expectations for stronger cash generation.

While expanding too slowly could leave the company behind competitors in AI, aggressive investment is putting pressure on free cash flow and margins, leaving investors increasingly focused on when those huge infrastructure investments will begin delivering stronger financial returns.