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Morning Edition · Thursday, October 29, 2026Published at 1:12 AM EDT · New York
Alphabet falls about 9% after hours as AI search features slow its ad growth
Microsoft spent less than expected on capital projects, and Nasdaq 100 futures pointed to a 1.3% lower open as investors reconsidered the suppliers that depend on Big Tech spending, including Samsung, whose shares slid in Seoul.
Nasdaq 100 futures pointed to a 1.3% decline at the open after Alphabet and Microsoft reported capital spending below expectations, the Financial Times reported. Investors gave the two companies very different verdicts.
Alphabet's cloud revenue doubled, but that did not satisfy investors, who worry that artificial intelligence (AI) is cutting into Google's ability to earn money from search queries, MarketWatch reported. It said the stock could post its worst drop in years. Shares fell more than 9% in after-hours trading, InvestingLive reported, which said Alphabet posted negative free cash flow of about $9.1 billion and that Google attributed slower search advertising growth to wider use of its AI Mode. Revenue rose 25% to $127.6 billion, slightly below estimates.
Microsoft's numbers went the other way. Its capital spending for the quarter was about $39.4 billion against expectations near $46.6 billion, and its Azure cloud business grew 48%, according to Mitrade's analysis. Investors rewarded the restraint. Suppliers, however, depend on the orders that this restraint removes.
That supplier risk reached Seoul. Samsung Electronics shares fell after the company gave an optimistic outlook but no detail on returns to shareholders, and quarterly profit came in slightly below analyst estimates, the Financial Times reported. Earlier this month Samsung guided to quarterly operating profit above $80 billion, the first South Korean company to cross that threshold, according to the Korea Times. Memory chips sold into AI data centers drove that profit.
Part of a tracked trend
AI Spending Meets Funding Limits
As AI capital spending shifts from internal cash flow to debt and private funding, each new spending increase will be answered with lower supplier valuations and higher financing costs until spending growth slows to what measured returns can support.
What this means
The market is now judging AI spending by who can pay for it out of free cash flow. Alphabet's negative free cash flow means its buildout is now drawing on its balance sheet, at the same time that AI-generated answers are eroding the search advertising that funds the spending. Microsoft's lower spending protects its own margins, but it also cuts orders for chip and memory suppliers such as Samsung. That is why supplier stocks fell even as Microsoft's own shares were rewarded for discipline. The consensus had treated spending by the largest cloud computing companies, known as hyperscalers, as a floor under semiconductor earnings. Today's results show that floor depends on each company's own cash generation. The relevant precedent is the 2000-01 telecom buildout: carriers cut spending once financing costs rose, and equipment suppliers absorbed the larger share of the loss. The desk's read is that over the next quarter, suppliers that depend on a few hyperscaler customers will trade lower relative to the hyperscalers themselves, provided Amazon and Meta also show spending discipline when they report. A sharp increase in their spending guidance would prove that wrong.
What to watch
- Amazon's and Meta's capital spending guidance this week. Lower numbers would confirm that spending growth has reached the limit of internal cash flow.
- Alphabet's search revenue growth over the next two quarters. Further slowing would show AI eroding the profitability of Google's core business.
- Memory-chip contract prices in Asia. A softer price would show the cut in hyperscaler orders reaching Samsung and SK Hynix.
Observations to monitor, not financial advice.
Synthesized from: Financial Times · MarketWatch · Financial Times
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Comments
1Oct 29, 5:12 AM
Google blamed slower search ad growth on its own AI Mode, which points to a problem earning money from AI answers rather than losing users to rivals, so AI Mode ad pricing is the figure to watch.