Alphabet (GOOGL.US) Q3 cloud revenue surged 103% year-over-year; free cash flow turned negative from positive; stock plunged over 11% after hours.

After the U.S. market close on Wednesday, Alphabet Inc. Class C parent company Alphabet (GOOGL.US, GOOG.US) released its third-quarter 2026 financial report. Following the announcement, Alphabet Inc. Class C shares plunged more than 11% in after-hours trading. Data showed that the company's quarterly revenue reached US$127.577 billion, up 25% year-over-year, marking the 13th consecutive quarter of double-digit growth; GAAP net income was US$26.468 billion, down about 24% from US$34.979 billion in the prior-year period; net income attributable to common shareholders was US$26.170 billion, down about 25% year-over-year; diluted earnings per share were US$2.12, below US$2.87 in the prior-year period, down about 26% year-over-year. In terms of profitability, Alphabet's third-quarter operating income reached US$40.576 billion, up about 30% year-over-year, with an operating margin of 31.8%, higher than about 30.5% in the prior-year period. The company said the strong performance was mainly driven by continued growth across business segments, especially with demand for artificial intelligence infrastructure and enterprise AI solutions driving a substantial increase in Alphabet Inc. Class C cloud revenue. By segment, Alphabet Inc. Class C Services revenue in the third quarter was US$96.302 billion, up about 11% year-over-year; operating income was US$39.157 billion, up about 17% year-over-year. Among this, Alphabet Inc. Class C Search and other revenue reached US$63.350 billion, up 12% year-over-year, becoming the main driver of growth in Alphabet Inc. Class C Services. The company said that driven by AI investments, Alphabet Inc. Class C search query volumes continued to grow, with year-over-year growth reaching the highest level in the past five years, and commercial search query volumes also increased. YouTube advertising revenue was US$11.207 billion, up about 9% year-over-year; Alphabet Inc. Class C advertising revenue overall reached US$82.012 billion, up about 11% year-over-year. In addition, revenue including subscriptions, platforms and devices reached US$14.290 billion, up about 11% year-over-year. Alphabet Inc. Class C cloud business was the biggest highlight of the quarter. In the third quarter, Google Cloud revenue reached US$30.709 billion, surging 103% from US$15.157 billion in the prior-year period, hitting a record high. Alphabet Inc. Class C said the strong growth in cloud business was mainly driven by continued expansion of demand for enterprise AI infrastructure, enterprise AI solutions and core cloud services under Google Cloud Platform (GCP). In addition, TPU system sales also made an important contribution to revenue growth. With the rapid expansion of revenue scale, Alphabet Inc. Class C cloud business profitability improved significantly. In the third quarter, Google Cloud operating income reached US$11.121 billion, up about 209% from US$3.594 billion in the prior-year period, and operating margin rose sharply to 36.2% from about 23.7% in the prior-year period. In other businesses, Alphabet's Other Bets segment third-quarter revenue was US$372 million, higher than US$344 million in the prior-year period; operating loss widened to US$2.047 billion from US$1.426 billion in the prior-year period. It is worth noting that although Alphabet's third-quarter operating income grew 30% year-over-year, net income declined significantly. The report showed that the company's third-quarter other net income and expense items recorded a loss of US$8.221 billion, compared with income of US$12.759 billion in the prior-year period. Among this, net loss on equity securities investments reached US$8.664 billion, compared with a gain of US$10.734 billion in the prior-year period. Alphabet noted that the loss on equity securities investments in the quarter had a negative after-tax impact of about US$6.7 billion on net income, equivalent to a reduction of US$0.55 in diluted earnings per share. Because the valuation of related investments may be affected by factors such as market volatility, other income and expense items may still fluctuate significantly in the future. On the AI business front, Alphabet CEO Pichai said the company's full-stack AI development strategy is driving accelerated growth across business segments. Pichai noted that Alphabet Inc. Class C's newly launched Gemini 4 Argon and Carbon models are at the forefront of AI technology. Currently, Alphabet Inc. Class C's proprietary model APIs process close to 32 billion tokens per minute, more than four times the prior-year level. Meanwhile, the Gemini app has reached 1 billion users, making it the fastest-growing product in Alphabet Inc. Class C's history. In addition, total global subscriptions for YouTube Music and Premium, including trial users, have exceeded 150 million. Pichai said AI investment is not only driving growth in Alphabet Inc. Class C search query volumes, but also driving continued expansion of demand for cloud computing and TPU systems. As enterprise customers' demand for AI infrastructure and solutions continues to increase, the company is expected to continue capturing market opportunities brought by AI development. In terms of cash flow, Alphabet's third-quarter operating cash flow was US$42.290 billion, below US$48.414 billion in the prior-year period. In addition, the company's capital expenditures increased significantly. Third-quarter spending on purchases of property and equipment reached US$51.355 billion, up about 114% from US$23.953 billion in the prior-year period, mainly reflecting the company's continued increase in infrastructure investment. Affected by the rapid growth in capital expenditures, Alphabet's third-quarter free cash flow turned to negative US$9.065 billion from about US$24.461 billion in the prior-year period. As of the end of the third quarter, the company's free cash flow for the trailing 12 months was US$19.747 billion. On the balance sheet, as of the end of September, Alphabet held cash, cash equivalents and marketable securities totaling US$265.098 billion, higher than US$126.843 billion at the end of 2025. On financing, the company received net proceeds of US$4.3 billion and US$8.1 billion in the third quarter from issuing Class A and Class C common stock, respectively, totaling about US$12.4 billion. In addition, the company issued senior unsecured notes during the quarter, receiving net proceeds of about US$28.7 billion. On shareholder returns, Alphabet's board of directors declared a quarterly cash dividend of US$0.22 per share to holders of Class A, Class B and Class C common stock, payable on December 14 to shareholders of record as of December 7. Alphabet said that as AI technology continues to drive search, cloud computing and other businesses, the company will continue to advance investment in AI infrastructure and related products to capture future growth opportunities.