Alphabet, Google’s parent company, saw its market value drop by around $500 billion this week after revealing that its core search advertising business is under pressure from AI-powered features. The company’s AI Mode, which generates summaries and answers directly in search results, is producing less advertising revenue than traditional search methods. This slowdown in revenue growth came amid a broader sell-off in AI stocks, as investors grew wary of high valuations and questioned the sustainability of heavy spending by AI firms.
During Alphabet’s earnings call on October 28, Google’s chief business officer Philipp Schindler acknowledged that AI Mode queries, while growing rapidly, are less monetizable than traditional searches. However, he expressed optimism about scaling advertising in AI Mode and AI Overviews. The company’s enterprise customers have shown strong adoption of its AI offerings, with Google Cloud revenues surging 103% year-over-year in Q3 2026.
The tech sell-off has highlighted concerns about whether AI companies can justify their massive investments in data centers and computing power. Google faces a unique challenge as its AI search features risk cannibalizing its core advertising business, especially with competition from AI chatbots like ChatGPT and Claude. The company is now experimenting with placing ads within AI-generated answers to improve monetization.
Investors are also watching free cash flow metrics, as Alphabet’s capital expenditure more than doubled to $51 billion in Q3 2026, while its free cash flow turned negative for the second consecutive quarter. This has raised fears of an AI bubble, particularly after reports of circular financing arrangements among major tech firms and AI developers. Despite these concerns, Google’s advertising business continues to grow, and its Cloud division reported a 103% revenue increase year-over-year.