Alphabet faces $200 billion AI bill as investors grow wary of cash burn

Alphabet reports third-quarter earnings after the bell on Wednesday, entering the release with a stock that has fallen in five of the last six trading sessions. Investors are currently scrutinizing the cost of the company's artificial intelligence expansion, a factor that has driven shares down approximately 7% in October. The market is watching closely to see if revenue growth can offset the ballooning infrastructure costs.

Consensus estimates from LSEG project revenue of $128.2 billion for the quarter, a 25% increase from the same period last year. This growth rate would mark the fastest expansion since 2021. Earnings per share are expected to land at $3.02. Despite the strong top-line performance, the bottom line faces pressure from massive spending on AI infrastructure.

FactSet data indicates that capital expenditures are projected to rise 130% year over year to reach $55.2 billion in the third quarter. In July, executives raised the full-year capex forecast to a range of $195 billion to $205 billion, up from previous guidance of $190 billion. This spending trajectory is expected to push annual capex over $200 billion this year and beyond $300 billion in 2027.

The heavy investment is straining cash flow. Analysts forecast negative free cash flow of $2.27 billion for the quarter, with the deficit expected to widen over the next four quarters. This marks the first instance of negative free cash flow for the company, a shift that has heightened concerns among Wall Street observers regarding the sustainability of current spending levels.

The company is funding this buildout through its cloud division, which is projected to grow 90% to $28.7 billion in revenue. Google is taking market share from Amazon Web Services and Microsoft Azure by rolling out Gemini models and custom tensor processing units. These TPUs compete directly with Nvidia's graphics processing units. Meanwhile, the core search business faces intensifying competition from new AI agents developed by OpenAI and Anthropic.

Citizens analysts, who maintain a buy rating on the stock, noted in a report last week that Google remains well-positioned in the AI sector. They added, "That said, execution risk exists, and we are incrementally cautious on Search as we believe competition is increasing with agents and requires another pivot." Company executives will hold a conference call with analysts at 4:30 p.m. ET on Wednesday.