Alphabet Shares Fall 12% as AI Costs Outpace Revenue

Alphabet shares plummeted by more than 12% on Thursday, marking the company's worst single-day performance in its history. The sharp decline erased over $500 billion in market capitalization, leaving the company valued at $3.42 trillion as of midday. This loss represents the second-largest wipeout in market history, trailing only Nvidia's $589 billion drop in 2025.

The sell-off followed Wednesday's release of quarterly financial results, which showed revenues falling below Wall Street expectations. Advertising sales also came in lower than anticipated. JPMorgan Chase analysts noted in a morning report that the slowdown in Google's search business was steeper than they had predicted.

Philipp Schindler, a senior vice president at Alphabet, told investors that the company's new AI Mode search feature was contributing to the dip in search ad revenue. Schindler explained that the feature currently displays fewer ads, though he added that ongoing experiments have shown promising results. Company executives also highlighted that the Gemini AI app has surpassed one billion users to offset the negative news.

The earnings call revealed a heavy financial burden associated with the company's artificial intelligence expansion. Alphabet disclosed commitments to more than $1 trillion in multiyear spending agreements for infrastructure, energy, and leases. The company plans to spend over $200 billion this year, double its 2025 expenditure. In June, Alphabet raised nearly $80 billion in capital to fund this buildout.

The market reaction extended beyond Alphabet's direct competitors. Microsoft shares rose briefly in after-hours trading before reversing to fall 1.5% by 1:20 p.m. ET Thursday. The Nasdaq Composite index dropped 1.5%, while the S&P 500 slipped by approximately 0.4%.

Suppliers to the AI industry also faced pressure. The Philadelphia semiconductor index fell 1.6% as chip stocks declined. Caterpillar, a major supplier of construction equipment for data centers, saw its shares drop 9% early in the day. This made Caterpillar the second-worst performer in the Dow Jones Industrial Average, which fell slightly more than 200 points.

Caterpillar's recent earnings report showed revenues beating expectations, but the margin of victory was smaller than traders had hoped. Investors are demanding higher returns from companies involved in the costly AI buildout, leading to aggressive selling of firms that only narrowly exceed targets.