Why Google’s advertising business is worrying investors amidst an AI stock selloff

Google parent Alphabet lost around $500 billion in value this week after it announced that its core search advertising business had taken a hit from its artificial intelligence (AI) summaries.

The company said its AI-powered search feature, AI Mode, was generating less advertising revenue than traditional Search, contributing to a slowdown in revenue growth.

The slide came amidst a larger sell-off in AI stocks, which picked up pace on Friday (October 30), with investors discouraged by high share prices and expressing scepticism about the industry’s continued spending spree, increasingly financed through borrowing and stock sales.

During Alphabet’s earnings call on Wednesday (October 28), Google’s senior vice president and chief business officer Philipp Schindler said: “It’s worth noting that the strong growth in AI Mode queries had an impact because of the lower monetisation we were seeing in AI Mode.” However, he maintained that the company felt “very good” about its trajectory in scaling advertising in both AI Mode and AI Overviews.

Interestingly, Google’s enterprise customers appear to have embraced the company’s AI offerings, as evidenced by the 103% growth in Google Cloud revenues in Q3 2026 over the corresponding period last year.

The tech selloff this week has drawn attention to a problem at the heart of the AI boom: major AI companies are spending big on data centres and compute even as questions persist over whether the revenues they generate will justify these investments.

Google in particular faces a unique challenge. As the company doubles down on its AI search features, its core business of Search, and the ad revenues powering it, risk being cannibalised in the process. This is accompanied by growing competition from AI-powered chatbots such as ChatGPT and Claude.

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First, how does Google make income from advertising?

For nearly 30 years, Google has been best known for its search engine. Users input text corresponding to a query they have into the classic search box and, within seconds, are greeted with pages of responses.

The order of these results is determined by Google’s proprietary ranking algorithms. These are known as organic search results, which Google ranks according to factors such as relevance. Separately, Google began selling advertisements alongside search results through Google AdWords (now Google Ads), launched in 2000.

Google Search allows advertisers to pay to display sponsored results prominently in response to relevant searches. For instance, a user searching for “quick getaways from Delhi during Diwali” signals purchasing intent more clearly than someone searching for “actor Sananth filmography”. Advertisers can select keywords relevant to their products or services, allowing their advertisements to appear alongside searches containing those terms or expressing similar intent.

The placement of these advertisements depends on an auction that considers factors including the advertiser’s bid, the relevance and quality of the advertisement, and the user’s search.

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Thus, while consumers continue to search on Google for free and at will, advertisers pay for the opportunity to show their ads in response to these searches. Google Ads moved from a pay-per-impression model, in which advertisers paid for the number of times their ads showed alongside search results, to a pay-per-click model in 2002, in which advertisers pay for the number of clicks they get on their ads. Although pay-per-click remains central to Search advertising, Google also offers other payment and bidding models depending on the advertising format and campaign objective.

Advertising remains central to Google’s business, accounting for approximately 64% of Alphabet’s $127.6 billion revenue in Q3 2026.

How could AI threaten this business?

Google’s AI-powered search has upended this user experience. Over the last two years, AI Overviews, Google’s AI-generated summaries of information, have begun appearing prominently on the results page, usually moving sponsored and organic links further down. A user who gets an answer directly may have less reason to click through to another website, potentially leading to fewer clicks on organic search results.

Separately, Google’s AI Mode, its AI-powered search feature, allows users to ask longer, conversational questions and follow up. Alphabet CEO Sundar Pichai described this shift: “Queries in AI Mode are on average three times longer than traditional searches, and one in five AI Mode searches globally use voice, images, or documents,” he said, adding that Google has “crossed over 50 billion visual searches per month.”

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Google has argued that many of these AI Mode queries are additional searches that users would not otherwise have made, rather than searches diverted from its traditional interface. If so, AI could eventually expand Google’s advertising opportunities instead of merely eating into existing revenues.

AI Mode also allows Google to compete more directly with conversational chatbots such as ChatGPT and Claude. However, Google has yet to earn as much advertising revenue from these interactions as from traditional searches.

Google attributed the overall slowdown to several factors, including currency movements. Search advertising revenue still grew 12% year-on-year.

Google is now introducing advertisements within AI-generated answers and conversations in an effort to improve monetisation.

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The question remains: Can Google earn as much from these new kinds of searches as it does from conventional ones?

And how does this selloff connect to fears of an AI bubble?

According to The New York Times, Amazon, Microsoft, Google and Meta are on track to spend more than $720 billion this year on data centres and other capital expenses, roughly three times what they spent two years ago. Some are increasingly turning to borrowing and stock sales to finance these investments.

One metric investors are using to assess the sustainability of this spending is called free cash flow, the cash remaining with a company after paying its day-to-day costs and new capital expenses. Of the four companies, only Microsoft reported positive free cash flow in the latest quarter, the NYT reported.

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Alphabet’s capital expenditure more than doubled to around $51 billion in Q3 2026, while its free cash flow turned negative for the second consecutive quarter. This has raised concerns about whether its AI investments can generate sufficient returns, even as growth in its core Search advertising business slows.

This has revived fears of an AI bubble, which gained momentum following a Bloomberg report in October 2025 detailing the extent of circular financing arrangements involving major technology companies, AI developers such as OpenAI and Anthropic, and chipmaker Nvidia.

However, the latest earnings do not establish that these investments will fail. Google’s advertising business continues to grow, while its Cloud division reported a 103% increase in revenue year-on-year. The uncertainty lies in whether the profits from AI will eventually justify the scale of investment.