Alphabet falls 11% in premarket, putting it on course for its biggest ever post-earnings drop

Alphabet shares were sharply down in premarket trading on Thursday while Microsoft rose as investors focused on the tech giants' latest spending and free cash flow numbers in their third-quarter earnings.

Alphabet was 11% lower in premarket trade while Microsoft was nearly 4% higher but pared some of those gains.

If Alphabet closes more than 9.77% lower on Thursday, it would be its worst post-earnings reaction ever. The company went public in 2004.

Microsoft reported $45.2 billion in capital expenditures and finance leases during the third quarter, which was 30% higher than a year ago, but below analyst projections of $50.67 billion. Free cash flow fell 27% to $18.63 billion but remained positive.

Alphabet, in contrast, reported negative free cash flow of $9.07 billion for the third quarter, which fell much further than the $2.70 billion analysts expected by analysts. The Google parent maintained its full year capital expenditure guidance of between $195 billion and $205 billion.

The earnings report comes as investors scrutinize AI spending plans of tech companies and are focusing on the returns on those investments.

"Microsoft is building out its architecture in a measured way and as such contains fewer surprises," Ben Barringer, global head of technology research at Quilter Cheviot, said on Thursday.

"Alphabet, by contrast, saw its share price hit after hours as a result of a fairly messy set of results and a poorly handled earnings call," Barringer added.

Nasdaq-100 futures were down more than 1% early Thursday.

Alphabet's biggest source of revenue, search advertising, grew 12% in the September quarter to $63.35 billion, but missed analyst expectations, adding further pressure to the company's shares.

Philipp Schindler, Alphabet's chief business officer, said the impact on the search business was partly because of lower monetization within the company's AI Mode. He added that Alphabet is now "scaling" ads within its AI Overviews and AI Mode products, including in international markets.

Google's search business has faced headwinds from the rise of other AI chatbots like OpenAI's ChatGPT and Anthropic's Claude. People may be carrying out more search queries outside Google. Gemini, Google's own AI chatbot, has failed to keep pace.

"The problem for Google is it faces an innovator's dilemma and doesn't know whether to protect its core business or look to join the disruption. As such, Google has lost its edge with Gemini and is behind peers on agentic AI," Barringer said.