Big tech companies lose nearly R$ 4.8 trillion, raising alerts about the AI bubble

The core business segments of American tech giants—advertising, consumer, and retail services, which support total AI spending of $750 billion this year—are beginning to show signs of deceleration. In some cases, the technology itself, on which companies are placing large bets, is starting to displace their traditional business models.

Earlier this week, Alphabet Inc., the owner of Google, reported that advertising sales through search and other channels—a segment accounting for about half of total revenue—grew the slowest in the last five quarters. Nevertheless, the company maintained its capital expenditure forecast at up to $205 billion for the current year.

Amazon.com Inc. stated on Thursday that growth in both its main online store and advertising business slowed in the last quarter, but the company confirmed its plan for capital expenditures of approximately $220 billion for this year. Microsoft Corp. and Meta Platforms Inc. also maintained their spending forecasts, presenting results that ultimately failed to meet investor expectations.

Earnings reports and subsequent stock sell-offs reveal growing tension surrounding the transition of major tech companies to new artificial intelligence-based products and associated costs. Companies are taking on unprecedented levels of debt, selling equity, entering into multi-billion dollar data center deals, and assuming trillions in future obligations to build global AI infrastructure. Meanwhile, new products are reducing profitability and diverting attention from some legacy offerings.

Investor patience is wearing thin. Alphabet shares plummeted by a record amount on Thursday, losing nearly $500 billion in market value. Amazon shares fell by 7% during trading, and Meta dropped 10% after publishing last week's earnings, when the company warned investors that its new AI agent application, Muse, requires enormous computational power despite plans to invest more aggressively in AI.

Dan Morgan, Senior Portfolio Manager at Synovus Trust, commented on the situation following Alphabet's report: 'The market is perplexed: how will all this pay off?'

Even Microsoft, which demonstrated strong growth in its cloud business and controlled costs, did not escape negative consequences. Initially, the company's stock rose after news that sales in Azure, its closely watched cloud computing division, increased by 48%, reaching $33.2 billion in the quarter ending in September. However, by the close of trading on Thursday, the stock erased all gains and fell by 0.2%.

Amazon's results were more mixed. The company postponed its annual Prime Day from the third quarter of last year to the second quarter of this year, which accounted for some of the slowdown. But analysts had already adjusted their estimates to account for this, and the results were still below expectations. The e-commerce giant's advertising services division showed an 11% growth, the slowest pace since Amazon first separated this category in 2022. Online store business grew by only 2%, a level not seen in over three years as people resumed pre-pandemic consumption habits and online commerce slowed down.

These results overshadowed the growth of Amazon's cloud computing segment and intensified investor doubts regarding its aggressive AI investments. Cloud computing was also a bright spot for Google: sales in this division more than doubled compared to the previous year, and operating income tripled. The division's CEO, Thomas Kurian, joined the earnings call for the first time, emphasizing the importance of this business for Google's future.

However, investors focused more on the problems arising in Google Search, which remains the company's lifeblood. To stay relevant amid the popularity of chatbots like ChatGPT, Google has integrated more AI into its search engine, including a dedicated tab called AI Mode. But the growing popularity of this feature has negatively impacted the profitability of Google Search. Philip Schindler, Chief Business Development Officer, admitted on Wednesday that the firm is seeing a 'decrease in monetization' of queries using AI Mode, leading to further stock decline. Schindler stated that the company is working to attract more advertising in AI Mode and views the product's trajectory optimistically.

This year, Google is struggling in the AI race against startups Anthropic and OpenAI. Bloomberg Intelligence analyst Mandip Singh believes that if the company can regain its footing in AI model development, it will likely resume delivering the expected investor revenues. Singh noted: 'With all these transitions, sometimes we focus too much on the donor business. Given the margin expansion in the cloud business, I believe the combination of cloud and search, once they reach parity, will return their profitability to previous levels.'

Jean Munster, Managing Partner at Deepwater Asset Management, commented on the decrease in AI Mode monetization at Google, noting that launching new ad formats often occurs with low margins that gradually increase over time. A more complex challenge for the firm is creating agents capable of making purchases on behalf of users and earning a commission from these transactions—a business model many in Silicon Valley consider achievable following the success of Meta's personal assistant Muse. Munster concluded: 'The old way of doing business was using blue links or display ads to influence consumer behavior. The new way is how to influence a bot.'

Alphabet Inc.'s equity has lost over $500 billion after the company reported disappointing sales figures in search and advertising. These results have raised investor concerns about the threat artificial intelligence poses to the company's core business, as well as rising infrastructure costs.

Alphabet shares fell by more than 13%, marking the largest market value collapse in the company's history. The company reported revenue of $111.2 billion for the third quarter, excluding partner payments, which was below analysts' forecasts. Ad revenue from search and other channels, which accounts for about half of total revenue and is critical for funding massive AI investments, also failed to meet expectations, showing the slowest growth in five quarters.

JPMorgan analysts, including Doug Anmut, noted that the results and market reaction 'show us the acceptable margin of error when a hyper-scale player spends hundreds of billions on creating AI infrastructure.' Shares dropped 13% to $281.37, wiping out $511 billion from Alphabet's market capitalization as of 9:35 AM in New York. This contrasts sharply with the results of competitor Microsoft Corp., which reported growth in its cloud business exceeding Wall Street expectations while controlling costs.

Philip Schindler, Chief Commercial Officer, stated during the investor call that the growing popularity of the AI Mode—a new tab in Google Search—negatively impacted financial results. He noted that AI-related queries have 'lower monetization' but expressed optimism, stating plans to add more advertising to this part of the search engine.

Investors have long worried about the impact of chatbots and AI features on the company's main revenue stream, as consumers turn to competitors like ChatGPT and Claude, as well as Google's own AI features. Pressure is mounting on Alphabet executives, particularly Sundar Pichai, to justify future payments exceeding $1 trillion that Google incurs for resources needed to realize its AI ambitions, including data centers, computing power, and energy.

Thomas Monteiro, Senior Analyst at Investing.com, believes that the current quarter is a 'moment of truth for Alphabet: either Pichai and his team will fix how the company monetizes AI, or the giant risks losing leadership in several of its core areas in the near future.' He emphasized that until Google can charge for AI in the same way it used to charge for search ads, all capital expenditure forecasts will look more like a 'bill than an ambition.'

The rapid build-up of AI infrastructure has driven the firm's capital expenditures to record levels. The company is working to modernize popular products such as Search, YouTube, and Gmail using AI. However, these efforts have not yet generated the revenue investors desire to justify all these expenses.

Total Google services revenue in the third quarter was $96.3 billion, falling short of the projected $98.4 billion. YouTube ad revenue was also lower than expected, reaching $11.2 billion. Meanwhile, Google's commitments in the AI sector are becoming increasingly expensive. By the end of the third quarter, Google's future obligations for acquiring resources such as computing power and energy reached $924 billion. Upcoming obligations, such as data center leases that have not yet begun, amount to $152 billion, bringing the company's total future liabilities to a sum significantly exceeding $1 trillion.

The company recorded negative free cash flow for two consecutive quarters, something unseen since its IPO. Anders Bylund, an analyst at Motley Fool, noted that 'search still generates the bulk of Alphabet's cash flow, and two consecutive quarters of negative free cash flow show that the pure math of AI is not working correctly right now.'

Alphabet announced in July that capital expenditures for the year could reach $205 billion, more than double last year's spending. AI requires enormous computational power, and Google is rushing to build data centers to meet the demand for AI from consumers, businesses, and its own employees.

Alphabet's investments have also put pressure on the company's financial results. These investments resulted in an $8.7 billion loss, largely due to Alphabet's stake in SpaceX. This is a sharp reversal from the profit made a year earlier and the unexpected gain in the second quarter, which was primarily driven by SpaceX and investments in a private company later identified by Bloomberg as Anthropic PBC.

The company's net income for the third quarter was $2.12 per share, significantly below Wall Street's estimate of $2.99 per share. A positive point was Google Cloud, viewed as a key indicator of demand for the company's AI products and hosting services. This division reported sales of $30.7 billion and profits of $11.1 billion, surpassing analyst forecasts of $29.1 billion in revenue and $9.8 billion in profit. Among the division's largest clients are startups like Anthropic, which compete with Google in the AI race.

Monteiro wrote that 'the cloud is thriving, but many of its best customers are building assistants that already surpass Google in consumer interaction. Currently, Alphabet is earning more by selling AI to its competitors than by using it itself, and this gap should continue to widen over the next few quarters unless its models change radically and quickly.'

In recent years, Google has sought to reimagine its search engine for the AI era, trying to maintain the user habit of relying on the company's answers despite the growing popularity of chatbots from OpenAI and Anthropic. The company now provides AI-generated answers in response to numerous search queries, which has had serious implications for businesses traditionally reliant on this search giant for traffic and advertising revenue.

Google has worked diligently to create an advantage by generating more personalized answers to questions, leveraging years of user data. However, recently the company has lagged behind Anthropic and OpenAI in developing AI coding tools. Google recently released Gemini 4, which the company claims excels in areas such as coding and cybersecurity, although some employees worry that the company has not fully caught up with its competitors.

Hours before the report began, Google announced another new AI model called Carbon, which could be a response to critics calling for an acceleration of AI development pace. Pichai told analysts during the call that 'we will soon have more models, including more efficient versions, to help developers optimize speed and cost and deploy them among our billions of users.'

Chinese companies in the artificial intelligence (AI) and semiconductor sectors have lost $480 billion (equivalent to approximately 2.52 trillion Brazilian reais) in market value in less than four months. This decline is attributed to concerns over AI demand, excessively high asset valuations, and potential restrictions on Chinese exports.

The STAR50 index fell by 40% during this period, interrupting two years of growth. The CSI300, the main index of large Chinese corporations' stocks, also suffered, dropping by about 20% from its peak reached in June.

The wave of selling did not have a single cause. Sources familiar with Reuters indicate that high stock prices, tax burdens, and the risk that the US and other countries will restrict the use of Chinese equipment in data centers are contributing factors.

The significance of the crisis lies in the share this sector held on the stock exchange. According to Goldman Sachs, AI-related stocks accounted for 42% of market capitalization and 57% of trading volume in mainland China and Hong Kong.

Among the affected companies are manufacturers of robots, chips, and components used in technological equipment. For the latter group, part of the pressure stems from actions taken by Washington aimed at restricting component supplies to data centers in the United States.

The devaluation has impacted investors who were betting on the growth of technology companies. Chen Wensheng, an entrepreneur from Hainan province, told Reuters that he purchased shares relying on official support for firms like Unitree, which received investments from Chinese state funds. Now, he and his acquaintances are incurring losses.

The downturn may also hinder capital raising for technology companies aiming for initial public offerings. Hong Hao, Managing Partner and Chief Investment Officer at Lotus Asset Management in Hong Kong, believes the crisis will slow down new stock offerings.

Despite the losses, valuations remain high. STAR50 trades at approximately 100 times annual earnings, which is lower than the peak level of nearly 250 times. For comparison, the Nasdaq 100 multiplier in the United States is around 30 times.

This turbulence occurs against the backdrop of efforts by Chinese authorities to reduce market volatility and improve investment returns. Measures being taken include combating high-risk operations and high-frequency trading. State investors have also sold shares during periods of growth to curb profits.

According to Leo Wang, a partner at Qianchuang Capital in Beijing, the excessive concentration in technology companies disrupts market balance. He stated: 'This created a serious bubble in certain sectors and a serious outflow of resources from others.'

Some asset managers see opportunities in cheaper stocks. Goldman Sachs has included Chinese AI companies in an updated list of recommendations. However, other investors prefer to wait for valuation declines.

Wang Zhou, a partner at Zhuozhu Investment Management in Shanghai, predicts that chip manufacturers and AI suppliers will face a price war, similar to what is happening in other industries in China. He noted: 'There are no exceptions. All bubbles inevitably burst.'