Google value plunges by $500bn as AI fears rattle Wall Street

Google's stock plummeted, losing over $500bn (£374bn) in value on Thursday, after revealing that its new AI search summaries were negatively impacting ad revenue.

This news sent investors into a tailspin, driving the stock to a six-month low. The shift occurs as Microsoft and Amazon also announced plans this week to maintain massive spending in the ongoing AI competition.

Alphabet's initial quarterly figures appeared solid; total revenue climbed 25% year-over-year to reach $127.6bn, bolstered by Google Cloud revenue surging 103% to nearly $31bn.

However, the company's profits dipped by a substantial 25% during the period. Furthermore, for the second time as a public entity, it reported negative free cash flow, exceeding $9bn—nearly double the cash loss reported just three months prior.

This increased outflow is almost entirely channeled into Google's AI initiatives. By the close of Thursday, the company's total market valuation had dropped to $3.46 trillion from $3.97 trillion the previous day.

The integration of AI summaries into Google Search results has directly reduced the volume of advertisements the platform could sell that quarter, which constitutes the majority of Alphabet's business.

Tracy Woo, a principal analyst at Forrester, noted that Alphabet's weak search performance "highlights the challenge of funding massive AI investments while maintaining the strength of established businesses."

Despite Google's chief business officer, Phillip Schindler, stating on Wednesday that he felt "very good about our trajectory" with the AI-enhanced search engine, the stock fell by nearly 13% on Thursday.

Amazon also faced investor disappointment on Thursday; its shares dropped 6% in after-hours trading, despite 11% quarterly sales growth hitting $201bn.

The company reported a staggering negative cash flow of $42bn, indicating that its spending has increased six-fold over three months. Andy Jassy stated this spending relates partly to opportunities in Amazon's chip-making and its Bedrock AI developer platform.

Satya Nadella of Microsoft reported revenue growth of 19% to $92.3bn, with its cloud business growing 30% to $63bn. He noted that Copilot usage has seen "automated tasks nearly double since July" as daily users increased by 500% from the prior year.

Yet, according to Woo, Wall Street is now scrutinizing the future potential of these AI promises, observing that "Microsoft's results reinforce that enterprise demand for AI remains strong, but they also highlight a much bigger question facing the technology industry, where AI value will ultimately be captured."