The third quarter earnings reports are coming in! And Google’s was so good it knocked 12% off the stock price.

Google Class A shares closed on Wednesday at $324.89. Today they closed at $283.82 — 12% down. Class C shares did much the same.

The culprit was AI — how much Google is spending and how much money they’re not getting back from it.

Revenue is way up! But net income is down a bit. AI search is worse, but it also makes less ad money. And cash flow is negative, from AI spending. Google is blowing a ton of money on AI buildout, and neglecting that they are, in fact, an ad agency.

AI Mode and AI Overviews are getting used in more searches, and they’re also up in the time they take — but they’re generating less ad revenue. Philipp Schindler from Google waffled a bit on the earnings call, but he eventually admitted: [Alphabet]

the strong growth in AI Mode queries had an impact because of the lower monetization we were seeing in AI Mode. To be clear, we feel very good about our trajectory here.

Well, that’s all right then! This is after a lot of talk on the call about people spending much longer talking to AI Mode when they’re searching something. That is, Google is failing to give good search results quickly.

Google is sure that wasting people’s time is good — even if it’s costing them directly. Because it’s AI! Google told us in May — all AI Mode is the future of search! What a great idea.

We usually say to ignore non-standard numbers in company accounts. But there’s one non-standard number that Google put in to the earnings report even though it looks terrible — the free cash flow calculation. That’s net cash coming in, minus “purchases of property and equipment.” [Alphabet, PDF]

Over the past four quarters, free cash flow has gone steadily down. It went negative, a loss of $5.8 billion, in second quarter — for the first time since 2004 — and down even further in third quarter, to a loss of $9 billion.

Google is, of course, blowing this money on AI. In fact, they’re committed to over a trillion dollars in infrastructure spending over the next few years. Here’s CFO Anat Ashkenazi on the earnings call:

We have also entered into multiyear agreements to secure capacity for technical infrastructure and inventory, as well as leases and energy. At the end of the third quarter, we had future purchase commitments of $924 billion and pre-commencement leases and other obligations of $152 billion.

Though they could get out of some of those commitments. So that’s nice.

How is Google going to pay for all of this? In July, Google issued another $85 billion in stock specifically to fund its AI ambitions. [FT, archive]

Google ads are doing great! Google Cloud is doing great! But the AI is a money pit and it’s dragging everything else down.

But Google CEO Sundar Pichai loves the chatbot. And he can afford to keep throwing money at it. I wonder if, when the crash comes, Pichai is the last man standing and still burning money on this thing.

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Some heartwarming news on Monday from Reuters: “In China, the AI bubble has already burst.” [Reuters]

You know about the AI bubble in the US stock and venture capital markets. But there’s a separate AI bubble in the Chinese stock markets.

We wrote in August about the humanoid robot companies like Unitree doing their own little bubble on the Shanghai and Hong Kong stock exchanges.

There is no market for humanoid robots and they don’t work. But the companies keep trying to talk up a market in China and the US. This is the future!

But in China, the retail mum-and-dad investors jumped in. They were sure this was the path to fortune. The government was even talking it up:

Chen Wensheng, a small business owner and investor from China’s southern Hainan, said he bought into the rally emboldened by what he felt was official support for the likes of ​Unitree, which counted state-backed funds as investors. But Chen and his friends are now nursing losses.

The STAR50 index of Chinese AI and semiconductor stocks had started picking up in April and it peaked in June. But the index has dropped about 40% since then. [Bloomberg, archive]

Tech stocks have been rallying in China for the past couple of years. The Chinese stock market tends to be really bubbly. But the government was hoping to get a steadier market, not just a boom and bust cycle. Then the STAR50 started going through the roof. Beijing fund manager Dong Baozhen told Reuters:

The stock market later evolved into a speculative crazy bull. And now we see ​the bubble bursting.

Chinese companies mostly get their funding from selling stock. Borrowing with bonds as US companies do is a lot rarer. So if stocks stay down in a post-bubble slump, that’s going to affect a lot of companies — useful ones as well as humanoid robot weirdos. Leonid Mironov at Gavekal Capital told Bloomberg:

If the weakness goes on for more than six months, this will make fundraising difficult and also imply that the market is unimpressed with the technological progress being achieved.

Chinese AI companies are still trying. We got the Kimi K3 chatbot model as open weights as a promotional loss leader for Moonshot’s planned IPO in Hong Kong in the first quarter of 2027. [Bloomberg, archive]

The Chinese government is trying to prop up the market by encouraging stock buybacks and making it harder to sell. I’m sure that’ll go great. [Bloomberg, archive]

The US AI bubble will burst. Even if only a few people dare say the word “bubble” about AI being the bubbliest bubble that ever bubbled.

But as fund manager Wang ​Zhuo told Reuters:

There’s no exception. All bubbles inevitably burst.

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