Alphabet CEO Sundar Pichai at the Google I/O Developer Conference in Mountain View, California, May 19, 2026.
David Paul Morris | Bloomberg | Getty Images
in of the alphabet While the overall performance was weak, there was one segment that stood out above all else. It’s a search.
Search and other segment revenue rose 12% year over year to about $63 billion, but fell short of expectations for the second consecutive quarter. At the same time, Google said search query growth on its platform was the strongest in five years.
As more people turn to artificial intelligence bots and agents, including the tools provided by Google, the gap between usage and revenue in the search giant’s core business is becoming harder to ignore. Since the early days of ChatGPT, analysts have predicted that traditional search would be replaced by AI and warned that Google would need to find new ways to make money. Search is still big business, but there are early signs of change.
“These things are going to be powerful,” Gene Munster of Deepwater Asset Management told CNBC’s “Fast Money” after the earnings report, referring to new AI-powered services. Munster said that if “personalized bots” become widespread, “that will be the starting point for commerce for many people, and that will influence Google’s position.”
Alphabet executives said currency was the biggest factor in the slowdown in search revenue this quarter, and that the impact would be even greater in the fourth quarter.
Shares plunged about 10% in after-hours trading after the company reported weaker-than-expected earnings and reported a negative $9 billion in free cash flow for the quarter, three times the estimated loss. In the second quarter, Alphabet’s free cash flow was negative for the first time as a public company, at $5.9 billion.
Google has spent much of the past year telling investors it needs to pour money into AI infrastructure and services to meet endless demand from consumers and businesses. Google’s Gemini model has helped the company stay competitive. human and OpenAIenterprise services powered by Gemini have proven to be a hit with customers.
The company also said Gemini is leveraging AI to improve its ability to understand user intent and make ads more relevant, strengthening its core digital advertising business.
“We continue to accelerate the deployment of the Gemini model across our advertising infrastructure to improve performance,” Chief Business Officer Philipp Schindler said on the earnings call.
In the third quarter, the company implemented what Schindler called “the biggest update to product listing ads in a decade,” adding new AI capabilities.
“Overall, AI is accelerating our advertising development and driving the majority of our product launches,” Schindler said.
Advertisers are also rapidly adopting AI tools. Schindler said the Gemini model helped advertisers generate more than 1.5 billion in campaign assets in the third quarter, an increase of more than seven times year-over-year.
But none of that accounts for search revenue growth, which fell from 19% in Q1 to 17% in Q2 and 12% in Q3.
UBS analysts said in a note that the results “bring search cannibalization concerns back to the forefront.” Mizuho analyst Jordan Klein also said the numbers matter for search and YouTube.
“This raises concerns that AI and agents will take share from Search and YT, negatively impacting their AI monetization story,” Klein wrote in a post-earnings note.
Cloud gives Alphabet the benefit of AI
One area where Alphabet’s AI investments are paying off big is in its cloud business.
Revenues in this sector are racing to catch up Amazon Web services and microsoft Azure more than doubled to nearly $31 billion in the quarter. Cloud backlog also stands at approximately $560 billion, reflecting massive contract demand for AI infrastructure. Management said it expects just over half of the backlog to be recognized over the next 24 months.
In Microsoft’s quarterly earnings report, also released after the bell on Wednesday, the software maker said Azure revenue rose 48% year over year to $33.2 billion.
Cloud demand is a big reason Alphabet continues to spend.
The company maintained its full-year 2026 capital spending outlook at $195 billion to $205 billion, with spending expected to increase significantly in 2027. Part of it is for tensor processing units (TPUs), Nvidia’s Graphics processing unit. Alphabet just started selling to external customers in the second quarter.
Google released Ironwood, its 7th generation TPU, in November 2025, 10 years after creating its first custom ASIC for AI in 2015.
Customer contracts first appear in Google Cloud’s backlog, and the company must spend money to build the system before it can deliver it and recognize the associated revenue.
“Cash is flowing out and we’re building our inventory base,” Alphabet Chief Financial Officer Anat Ashkenazi said in an earnings call. “Once we start delivering these TPU systems and charging our customers, we will see cash coming in.”
Still, Google must contend with long-standing concerns about cash cows. Gil Luria, an analyst at DA Davidson, said the concerns that existed between 2023 and 2025 about the impact of AI finally appear to be playing out in Google’s business.
“Investors will now be concerned that failures in search, YouTube and subscriptions will lead to missed profits, a sign that AI is finally here at Google,” Luria said in an email. “I don’t want to jump to conclusions based on one quarter, but we definitely need to reevaluate what the world of agent commerce means for us.”
WATCH: Google Cloud soars as search slows down
