Google admits AI search makes less money, but it's fixing that with more ads

Alphabet’s third-quarter 2026 results showed revenue rising 25 percent year over year to nearly $128 billion, while net income reached more than $26 billion. Yet earnings per share fell short of analysts’ expectations, and the stock dropped nearly 12 percent. Google search volume grew 12 percent, down from 17 percent in the prior quarter and 19 percent in the first quarter; search revenue was flat. Executives acknowledged that AI Mode searches currently generate less money than conventional searches because they show fewer, lower-priced ads. Google expects that to improve as advertisers learn how to use the format, and says its research finds users consider AI search ads more relevant.

Google plans to expand contextual ads in AI Mode internationally and introduce US ads that can change during back-and-forth conversations. The move comes as the company presses ahead with costly AI expansion: quarterly capital spending was $51.4 billion, and negative cash flow widened from $5.8 billion to $9.06 billion. Google expects to spend $195 billion to $205 billion in 2026 and more than $300 billion in 2027. It points to rapidly growing cloud revenue, which benefits from demand for AI computing, but that business also depends partly on AI companies continuing to attract funding. The central risk is that Google is investing heavily in AI while search growth slows and AI search earns less, leaving the payoff uncertain.