Shares in Google’s parent company Alphabet dived by almost ten percent on Wednesday, after the web giant admitted AI-powered searches earn it less money than it earns by serving ads with its old-school search engine.

Alphabet on Wednesday reported its Q3 results, which included news that its year-over-year search query growth rate is the highest it’s been in the last five years. Some of that growth comes from users adopting “AI Mode” – Google’s latest LLM-powered search system. Google’s revenue from search rose 12 percent year-over-year to $63.25 billion, a little lower than the 14.5 percent growth the company reported in last year’s Q3.

During Alphabet’s earnings call, chief business officer Philipp Schindler said the slowdown was caused by “lower monetization we were seeing in AI Mode.”That’s a worry given that Google is spending enormous sums on infrastructure. $51.4 billion went out the door in Q3, around two thirds of it going towards servers and networking equipment. The rest funded datacenter builds. That spending appears to have impacted profitability, as Alphabet reported $26.17 billion net income for the quarter. Last year’s Q3, during which Google revenue was $102.35 billion, produced $35 billion net income.

Schindler argued that AI search will pay off. “On AI Mode, 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, creating more monetization opportunities over time.”

Google tried to seize one of those opportunities today, by turning on ads alongside AI Mode searches around the world, after first testing them in the US only. But for now, AI Mode searches aren’t as lucrative as Google’s existing search business, which brought in just under half of Alphabet's $125.8 billion quarterly revenue.

Google’s cloud is its next-best earner, at $24.75 billion for the quarter, but it has troubles too because the Big G doesn’t have enough capacity to serve all its customers. The company has started to offload some customer workloads to third parties, and warned that will dent its future margins. Thomas Kurian, Google Cloud’s CEO, said the company has over 100 companies using its TPU silicon, adding that “All of the inventory for TPU systems are associated with committed contracts” – meaning Google can see some revenue to cover some capex.

The company expects to book revenue from TPU sales to third parties in coming quarters. CEO Sundar Pichai was full of optimism for future AI revenue, noting that Google’s Gemini app has won a billion users faster than any other product in the company’s history, and praising the performance of its models. He said Google is moving fast to create agentic AI tools, but will focus on business customers for starters, “because the bar for security, safety, and governance is extremely high.”

“As a next step, we are bringing these features to Search and also, of course, to our billion users on the Gemini app,” he added. Pichai didn’t say when agentic AI will come to search or if he expects it will avoid the monetization issues AI Mode has already caused. Yet the company also stuck to its $195-$205 billion capital expenditure forecast for this year and said it intends to spend “significantly” more in 2027. ®