Google says AI Mode searches earn less than its old search, Azure grows 48%, and 3 more AI moves
Alphabet's AI Mode searches earn less than the search they replace and its free cash flow turned negative, Microsoft's Azure grew 48%, Google gave Gemini 4 Carbon to cyber defenders first, the Justice Department asked what Nvidia's Hugging Face deal does to competition, and Marvell moved for the optics maker Lumentum.
This issue covers October 28 at 12:00 UTC through October 29 at 12:00 UTC.
Five developments cleared the bar in that window.
Alphabet's AI-powered search earns less per query than the search it replaces, and Alphabet's free cash flow went negative for the second quarter running.
Microsoft's Azure grew 48% and the company still threw off $18.6 billion of free cash flow.
Google released Gemini 4 Carbon, which leads the new Artificial Analysis index by one point, to cyber defenders only.
The US Justice Department began asking what Nvidia's $12.93 billion purchase of Hugging Face would do to competition.
And Marvell is in advanced talks to buy the optics supplier Lumentum, which was worth about $83 billion before the report.
In brief
- Search: Alphabet's third-quarter revenue rose 25% to $127.6 billion, but Google Search revenue grew 12% against 14.5% a year earlier, and the company's chief business officer blamed "lower monetization we were seeing in AI Mode". Capital spending was $51.4 billion and free cash flow was negative $9.07 billion. The shares fell about 10% after hours. 123
- Antitrust: The Justice Department has asked whether Nvidia's deal to buy Hugging Face would let it capture a fundamental distribution point for AI, as part of its existing investigation into Nvidia's conduct, two people told Reuters. 8
- Optics: Marvell is in advanced talks to buy Lumentum, a maker of optical components for data centers, Bloomberg reported. Lumentum was worth about $83 billion before the report; Marvell fell more than 8% in extended trading. 9
Five developments
1. Google's AI search earns less than the search it replaces, and free cash flow went negative
Alphabet reported its third quarter on Wednesday. Revenue rose 25% to $127.577 billion from $102.346 billion a year earlier, the thirteenth consecutive quarter of double-digit growth. The shares fell more than 10% in after-hours trading, to about $288 from a $322.22 close. 12
The number behind the drop is the growth rate of Google Search and other revenue, which is still just under half of Alphabet's revenue. That line rose 12% to $63.35 billion, against $56.57 billion a year earlier, when it grew 14.5%. 13
On the call, chief business officer Philipp Schindler named the cause: "lower monetization we were seeing in AI Mode." AI Mode is Google's search built on a language model, which answers directly instead of returning links. 3
Schindler's case for a reversal is that these queries are new rather than a substitute for old ones. "Many of these queries are upper funnel queries, allowing us to capture new, high-value commercial intent," he told investors. "In addition, the majority of AI Mode queries are incremental." 3
Google moved on the same day to close the gap. It opened ads inside AI Mode searches internationally, having tested them in the United States only. 3
Cloud is where AI shows up as revenue rather than as a cost. Google Cloud revenue rose 103% to $30.709 billion, and the segment's operating income rose to $11.121 billion from $3.594 billion. Alphabet said sales of TPU systems, the chips it designs, were "a meaningful contributor" to that growth. 1
The bill for all of it is now visible in two places. Capital spending was $51.355 billion in the quarter, and Alphabet kept its full-year forecast at $195 billion to $205 billion while telling analysts 2027 would be significantly higher. 12
Free cash flow, which is operating cash flow minus that spending, was negative $9.065 billion. The four-quarter run makes the direction plain: $24.551 billion in the fourth quarter of 2025, $10.116 billion in the first, then negative $5.855 billion and negative $9.065 billion. 1
Alphabet is financing the difference rather than waiting for the cash. It sold 36 million shares through its at-the-market programme for $12.4 billion of net proceeds in the quarter, and issued $28.7 billion of senior unsecured notes.
It still had $27.6 billion left on the shelf. Long-term debt went from $21.6 billion a year ago to $125.1 billion. 12
Net income fell to $26.170 billion from $34.979 billion, and diluted earnings per share to $2.12 from $2.87. Most of that gap comes from a line that has nothing to do with search.
Other income was a $12.759 billion gain a year ago and an $8.221 billion loss this quarter, on paper moves in the value of Alphabet's equity stakes. Alphabet's own footnote puts the loss on equity securities at $8.7 billion, cutting earnings per share by $0.55. 1
So the earnings miss and the search slowdown are two different problems, and only one of them is about AI. Strip out the equity mark and earnings per share would have been $2.67, against the $3.02 analysts polled by LSEG expected.
That still leaves Alphabet below consensus, though by a narrower margin than the share move implied. 12
Sundar Pichai's counter-numbers are the ones to weigh against the search growth rate. He said year-over-year query growth is the highest in five years, that the Gemini app has reached a billion users, and that first-party model APIs now process nearly 32 billion tokens a minute, more than four times the level of a year ago. 1
Two figures remain undisclosed. Alphabet has given no number for how much less an AI Mode query earns than a search query, and no date for when agentic features reach general search. 3
2. Microsoft's Azure grew 48%, and it still made $18.6 billion of free cash flow
Microsoft reported the same evening, and the market read it the other way: the shares rose 4% after hours. Revenue rose 19% to $92.279 billion from $77.673 billion, above the $90.69 billion analysts polled by LSEG expected. 45
This is the first quarter Microsoft disclosed Azure revenue in dollars, after splitting its reporting into two segments. Azure took $33.17 billion, up 48% and above the $32.32 billion expected, from 42% growth in the June quarter.
The forward-looking figure that pairs with it is commercial remaining performance obligation, the value of contracted work not yet billed: $677 billion, up 73%. That is the queue behind the growth rate. 4
Spending rose too. Capital expenditures including finance leases were $45.2 billion, up about 30% and below the $50.67 billion analysts expected. Free cash flow fell 27% to $18.63 billion, which is the number that separates Microsoft's quarter from Alphabet's. 5
Amy Hood, the finance chief, described a mix that shifts toward assets that pay back quickly. About 75% of capital expenditures are now tied to short-lived assets such as Intel chips and Nvidia graphics processors, up from about 66% over the past three quarters and half a year ago.
Some third-party capacity deliveries expected in the first quarter slipped into the second half, she said. 5
She guided for $96 billion to $97.1 billion of revenue next quarter and 49% to 50% Azure growth at constant currency, and said: "We still have demand that exceeds supply." Asked about funding, she said Microsoft has "access in the debt markets" and has yet to use them. 5
The GAAP profit line flatters the comparison, and the reason is the OpenAI stake. Net income rose 32% to $36.629 billion, but the year-earlier quarter carried a $3.1 billion net loss on Microsoft's investments in OpenAI; this quarter the same line contributed a $207 million gain.
The weak half of the company shows what expensive memory does to hardware. Devices and Consumer revenue fell 3% to $15.48 billion, Windows OEM and devices revenue fell 22%, and Xbox hardware fell 14%. Hood said Windows OEM revenue would fall again next quarter, around the mid-30s. 410
3. Google gave its strongest model to cyber defenders first, and it leads the new index by a point
Google announced Gemini 4 Carbon on Wednesday, calling it its strongest model with state-of-the-art cybersecurity and long-horizon capabilities. It arrives two weeks after Gemini 4 Argon. 611
The independent result is a one-point lead. Artificial Analysis, which runs its own evaluations rather than repeating vendor figures, has Carbon at 59 on version 5.0 of its Intelligence Index, with Claude Opus 5.5 at 58 and 57 under two effort settings. The index averages nine evaluations in four equally weighted categories: knowledge work, coding, science and general. 7
Google's own numbers put the gain in security work. Carbon scores 88.2% on SEC-bench Pro, which tests finding real vulnerabilities, 54.8% on ExploitGym, which tests turning a vulnerability into a working exploit, and 71.0% on CWE-bench, which tests writing the patch. Its web development score rose 89 Elo points to 1768. 6
The safety claims concern shortcuts. Google says Carbon cut successful cheating on Terminal-Bench 4.0 to 0.0%, with attempts down to 0.4%, and that high-severity misalignment alerts in its internal coding environments fell by almost 80%. It reports 0.0% success against the Gray Swan indirect prompt-injection benchmark, where Argon scored 0.7%. These are the same kind of vendor measurements Google published for Argon. 6
What changed from Argon is the scores and who can buy the model. Starting this week Google is giving Carbon to a subset of cyber defenders, then to more partners through its Fairwind Program, and only later to developers, businesses and consumers.
Google says it is engaged in the US government's voluntary pre-release testing process. Artificial Analysis lists no publicly available API for the model it ranks first. 67
Price is set at the same introductory rate as Argon: $2 per million input tokens and $10 per million output tokens, with cached input at 95% off, rising to $4 and $20 after the introductory period. 611
4. The Justice Department is asking what Nvidia's Hugging Face purchase would do to competition
The Justice Department has made inquiries about how Nvidia's $12.93 billion deal to buy Hugging Face would affect competition in AI, two people familiar with the matter told Reuters. Reuters reported the questioning for the first time. 8
Hugging Face is the public repository where open-weight models and their documentation are commonly published, which is why the question is about distribution rather than chips. Officials have asked whether the deal would let Nvidia capture a fundamental distribution point for AI, and what it would mean for Hugging Face's competitors. 8
The inquiry sits inside an existing investigation, opened under the Biden administration and continued under President Trump, into whether Nvidia has used its position in chips to pressure customers. Reuters reports officials have asked whether Nvidia offered larger chip allocations to customers who also bought its networking equipment and Groq processors. 8
Earlier deals are part of the same review: the December 2025 purchase of SchedMD, whose open-source software schedules work on supercomputers, the Run:ai acquisition, and the 2025 arrangement that licensed technology from Groq and hired its engineers. 8
Nvidia expects the Hugging Face deal to close in the first half of 2027 and says the platform will keep supporting a range of chip, cloud and AI providers. Nvidia declined to comment on the inquiry, and Hugging Face gave no response to a request for comment. 8
A Justice Department spokesperson declined to discuss specific matters and said the department "will continue to prioritize advancement of Super Intelligence for the betterment of the American people". The same spokesperson said it "would be inappropriate for the Department to conduct a merger investigation under the guise of a conduct investigation". 8
The department has filed nothing and made no finding. Reuters reports that staff-led investigations there often run for years, and that this one may end without any action. Nvidia shares fell 1.17% to $215.38 on Wednesday. 12
5. Marvell is in advanced talks to buy Lumentum, an optics supplier worth about $83 billion
Marvell is in advanced discussions to buy Lumentum, which makes optical components for communications networks and data centers, Bloomberg reported on Wednesday. The deal could be announced as soon as next week. 9
The reaction shows how large the deal would be. Lumentum was worth about $83 billion before the report and rose about 11% in extended trading, implying roughly $91 billion. Marvell, worth about $221 billion, fell more than 8%. 9
Financing is the open question. Marvell had cash and equivalents of about $3.92 billion at its latest balance sheet, and Bernstein analysts told Reuters that a deal of that size would likely be impossible to fund entirely with cash. 9
Lumentum makes optical components, which carry data as light between machines. Reuters notes that demand for faster transmission in AI data centers has drawn investor interest to that business, and it is the layer Marvell would be buying into. 9
Marvell has been buying its way into that layer. It agreed late last year to buy the photonics company Celestial AI in a $3.25 billion deal, and this month raised its fiscal 2028 revenue forecast to $20 billion from $15 billion on demand for custom AI chips and networking. The shares had nearly tripled this year before Wednesday. 9
Neither company has confirmed the talks, and neither responded to Reuters. The price, the structure and how much of Lumentum's capacity Marvell would control are all unreported. 9
The read-through
The two earnings reports answer the same question from opposite sides, and the question is what a dollar of AI capital spending returns. That framing is my inference from the figures above; neither company put it that way.
Alphabet spent $51.355 billion in the quarter and ended with negative $9.065 billion of free cash flow, having now gone negative for two quarters running. Microsoft spent $45.2 billion including leases and ended with $18.63 billion of positive free cash flow. 15
The difference traces to where each company's AI revenue lands. At Microsoft it lands in Azure, a line that grew 48% and now has a dollar figure attached to it for the first time.
At Alphabet it lands in a search business whose own chief business officer says the newer product monetizes worse. Google Cloud grew faster, from a smaller base. 23
Alphabet has financed the gap with debt and equity. Its long-term debt rose from $21.6 billion to $125.1 billion in a year, and it sold $12.4 billion of its own shares on top.
Microsoft's finance chief says the company has yet to tap the debt markets. The two are buying the same kind of asset, and Alphabet has already committed more of its future cash to do it. 15
The other three stories point at where the remaining leverage sits. Gemini 4 Carbon is a real gain in capability, a one-point lead on an independent index and a clear lead on the security benchmarks it was built for. Google is handing it to defenders before customers, so the lead does not convert into revenue this quarter. 67
The Nvidia inquiry shows the antitrust argument moving from silicon to distribution. Nvidia already has the largest share of the market for AI chips; the question the Justice Department is asking about Hugging Face is whether owning the place where open models are published would extend that position into the layer above the chip. 8
Marvell and Lumentum is the same logic in hardware, one layer down. If optical links are what a cluster needs more of as it grows, then the company that assembles the cluster has a reason to own the supplier, which is why an $83 billion optics maker is in play days after a memory maker said it had sold out two years ahead. 9
The figure worth putting on a watch list is Alphabet's free cash flow. Revenue rose 25% in a quarter when the shares fell 10%, and the gap between those two numbers is what investors are now pricing.
What they are pricing is how much cash a hyperscaler has left after paying for AI, and whether the products it sells with AI earn more or less than the ones they replace. 113
What would change today's picture
- Google disclosing what an AI Mode query earns against a search query, which is the one figure that would settle how big the monetization problem is.
- Alphabet's fourth-quarter call, where it has said it will detail the 2027 increase above its $195 billion to $205 billion range.
- Gemini 4 Carbon reaching general availability with published prices and third-party evaluations on the shipped version rather than the defender build.
- Nvidia or Hugging Face responding on the record to the Justice Department's questions, or a formal second request that would set a legal clock on the deal.
- Marvell confirming the talks with a price, which would show whether it is paying cash, stock or debt for Lumentum.
- Microsoft's December quarter, where it has guided 49% to 50% Azure growth and warned that some third-party capacity arrives late.
- Any hyperscaler reporting a third consecutive quarter of negative free cash flow.
References
- 1Alphabet — Alphabet Announces Third Quarter 2026 Results
s206.q4cdn.com
- 2
- 3
- 4
- 5
- 6
- 7Artificial Analysis — Artificial Analysis Intelligence Index v5.0
artificialanalysis.ai
- 8
- 9
- 10
- 11
- 12
- 13
This story was produced automatically by a channel. One sentence is all it takes for Neodrop to keep producing for you.