TOP STORY
📉 Google Sinks 12% as AI Starts Eating Its Search Business

🐝 Last night, Microsoft ($MSFT) and Alphabet ($GOOGL) reported earnings back-to-back as Big Tech earnings season continues… which means it's time for another special edition mid-week Buzz breaking them down!

😬 As we covered on Sunday, the market is on edge about who's paying for the AI buildout, with Meta falling 10% after reporting negative free cash flow and admitting to an "increasingly challenging environment for raising capital."

🤔 So last night all eyes were on Microsoft and Alphabet to show that AI spending is turning into growth… (ideally without needing to borrow or sell shares to get there).

📉 And last night we saw two very different stories:

• Google ($GOOGL) crashed 10% in after-market trading, and opened down 12% this morning… putting it on track for its worst post-earnings drop since going public in 2004

• Microsoft ($MSFT) jumped 4% in after-market trading and opened down about 1% this morning (likely in part driven by the Google scare)

🤿 So let’s break down both, starting with the big one: Google’s historic crash…

📉 Google Sinks 12% After Its Ad Growth Slows Down

📊 First, let’s look at the numbers:

• ❌ Revenue hit $127.6 billion vs. $127.9 billion expected, up 25% year-over-year

• ❌ Earnings per share came in at $2.12 vs. $3.01 expected, down 26% year-over-year

• ✅ Google Cloud revenue hit $30.7 billion vs. $29 billion expected, up 103% year-over-year

• ❌ Google Search revenue came in at $63.4 billion vs. $65 billion expected, up 12% year-over-year (vs. ~15% expected)

• ❌ YouTube ad revenue came in at $11.2 billion vs. $11.4 billion expected, up 9% year-over-year (down from 13% last quarter)

• ❌ Free cash flow came in at -$9.1 billion vs. +$2.7 billion expected (and negative $5.9 billion last quarter)

• ✅ Google Cloud backlog hit $561 billion, up from $514 billion last quarter

🤔 So how does a company post numbers like that and still crash? The two main culprits were search revenue and AI spending… let’s break down both.

🔍 Slowing Search Growth

📉 The main reason for the crash is that search growth has now slowed for two straight quarters (19% in Q1 → 17% in Q2 → 12% now), coming in about $1.5 billion short of what analysts expected.

🧠 Alphabet's ad chief blamed a bigger-than-expected shift to AI Mode (Google's chatbot-style search), which doesn't earn as much per query yet… even though Search query growth is actually at its highest rate in 5 years, with AI Mode searches averaging 3x longer.

🧮 In other words: people are searching on Google more, but Google is earning less per search… which is exactly the AI cannibalization fear the market had a few years ago, before Google caught up to ChatGPT.

🛡️ Google says it's now "scaling" ads inside AI Overviews and AI Mode… but analysts weren't reassured, with UBS writing the results are "going to bring Search cannibalization fears right back to the forefront."

💬 BNP Paribas' Nick Jones said the Search miss adds to fears that AI tools like ChatGPT and Meta's Muse could displace Google… and since Search pays for a huge portion of Google's AI buildout, slowing Search means less cash to invest just as CapEx ramps up.

💪 That said, Search isn't Google's only cash cow… and the other one helped ease fears a little (although not enough to stop the crash)…

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TOP STORY CONT
💰 Google Cloud Doubles… But AI Spending Soars Even More

🚀 But while search growth slowed, Google Cloud soared. Google Cloud revenue more than doubled to $30.7 billion… and it did so profitably, with $11.1 billion of operating income at a 36% margin, putting the "Cloud margins have peaked" fears to bed.

📈 The future orders are even more staggering, with the Cloud backlog jumping $47 billion in a single quarter to $561 billion… including Anthropic, which has committed roughly $115 billion to Google for computing power, about a fifth of the entire backlog.

🔥 Even Google’s chips are selling, with demand for its custom TPUs (the computer chips Google designs to power its AI, instead of buying them all from Nvidia) strong enough that JPMorgan Chase just became the first company to buy them for its own data centers.

✨ And just hours before earnings, Google released Gemini 4 Carbon, its newest frontier model, claiming it beats OpenAI's GPT-6 Astra and Anthropic's Claude Opus 5.5… all while Gemini officially crossed 1 billion users, which Pichai called the "fastest-growing product in Google's history."

⚠️ But not everyone is celebrating, with some analysts worried about the price tag on all this growth:

💸 Mounting CapEx Costs

🩸 Google’s free cash flow came in at negative $9.1 billion this quarter… three times the deficit analysts expected, and even deeper than last quarter’s negative $5.9 billion, which was its first red quarter since going public.

🧮 To be fair, there's a good reason for some of that cash burn: Google has to build its TPU systems before customers pay for them. As CFO Anat Ashkenazi explained it: "You see cash going out, and we're building up the inventory base… as we start delivering and billing customers for these TPU systems, then you see cash coming in."

📅 The company kept its 2026 CapEx guidance at $195-205 billion, but said 2027 spending will "increase significantly"… without giving a number:

🔮 Fortune estimates that number could hit $300 billion in 2027 (roughly 50% higher than this year), which analyst Jeremy Saltsburg says "could potentially scare the market" now that free cash flow is negative…

🐂 Still, Wall Street stayed mostly bullish, with 22 of 26 analysts rating Google a "Strong Buy" per TipRanks, with an average price target of $427.25… roughly 50% above where the stock opened this morning.

🤔 So… was the sell-off justified?

📈 Well, as you can see from the analyst price targets, many don’t think so. Dan Ives says Wall Street has underestimated "how fast backlog converts once capacity lands," with the $561 billion backlog as evidence:

📉 Others think the crash is well-deserved, and that the Search slowdown matters more than the Cloud numbers. D.A. Davidson's Gil Luria told CNBC:

🤷‍♂️ Honestly, I can see both sides: Cloud proves the demand is real, but Search is the cash machine that’s been paying for all of it… and if it keeps slowing, Google has to lean harder and harder on a business that’s still burning cash to grow.

🧘 And while a drop like this feels big, it’s worth remembering that even after today’s crash, Google has still roughly doubled over the past 5 years… and the stock is simply back to where it traded about a year ago.

🤑 Add in the fact that it now trades at roughly 15x earnings, and today’s story is less “the end of Google” and more the market resetting its expectations until Search proves itself.

👀 So what does it look like when a hyperscaler actually passes the market’s test? Well, last night Microsoft gave us the answer…

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EARNINGS RECAP CONT.
⭐️ Microsoft’s Cloud Speeds Up to 48% Growth… Without Burning Cash

✨ While Google was punished for slowing growth and burning cash, Microsoft showed the opposite. By the numbers:

• ✅ Revenue hit $92.3 billion vs. $90.8 billion expected, up 19% year-over-year

• ✅ Adjusted EPS came in at $4.89 vs. $4.72 expected, up 18% year-over-year (net income of $36.6 billion)

• 🔮 Q2 guidance came in at $96-97 billion vs. $95.6 billion expected (~19% growth), with Azure targeted to grow 49-50% vs. 45% expected… all helping shares rise about 4% after hours

👀 But possibly the most important news: for the first time ever, Microsoft officially shared Azure's quarterly dollar revenue: $33.2 billion this quarter, a run rate well above $130 billion a year, with Azure growth accelerating to 48% even though some third-party data center capacity was delayed:

🌟 But Azure wasn’t the only star on the quarter’s report card…

🤖 Copilot Is Finally Showing Up in the Numbers

🏢 After months of questions about whether anyone is actually paying for Copilot, CEO Satya Nadella had answers, saying "customers are increasingly turning to Copilot to get real work done":

• 🤖 Customers with 50,000+ Copilot seats are up 8x year-over-year

• 🚀 Daily Copilot users are up ~50% from last quarter and 5x year-over-year, with the new high-end 365 E7 bundle already at "millions" of paid seats (Volkswagen alone is rolling it out to 330,000 employees)

• 💻 GitHub Copilot hit 50 million users, with revenue up more than 60% from the previous quarter

💰 Remember the "per-seat collapse" worry we covered back in January (AI letting companies get by with fewer employees, shrinking the software seats they pay for)? Microsoft's answer is new usage-based billing, where businesses pay directly for the work AI agents deliver. Or as one analyst put it:

💬 Management credited stronger GitHub Copilot (the AI coding assistant) adoption for helping results beat expectations, which might be the clearest sign that AI demand is turning into real revenue for the company.

💰 But AI revenue doesn’t happen without a lot of investment. So what’s Microsoft’s CapEx situation looking like?

💰 Cash Flow Stays Positive

🏗️ Recently, the market has cared less about whether AI works and more about what it costs… and this is where Microsoft earned extra credibility.

📅 For the quarter, CapEx came in at $45 billion vs. $50 billion forecast, with Q2 guidance coming in at over $50 billion vs. ~$53 billion expected.

💵 And while free cash flow is down 27% year-over-year, it’s still positive, and most importantly, the company says it will stay free cash flow positive all year, and has plenty of cash on hand thanks to “strong business performance.”

⚡ Even better is that 75% of Microsoft's CapEx is now going to short-lived assets like GPUs and CPUs (up from 66%), which Hood says reflects a focus on infrastructure that generates a return quickly:

🧮 So all in all: with Meta needing a new share class to raise money, and Alphabet having already raised $85 billion in stock, Microsoft is currently the only hyperscaler showing investors it can fund its AI buildout from its own cash flows… and it's being rewarded for it.

🚩 But not everything’s perfect. For one, spending keeps accelerating, which means free cash flow will keep shrinking. And according to Hood, CapEx will speed up in the second half, something Truist analyst Terry Tillman had flagged ahead of the report as a “key risk to monitor.”

⚖️ Now, this doesn’t mean Microsoft is simply the better company… Google Cloud actually grew more than twice as fast as Azure (103% vs. 48%).

🏎️ But it does show the market is increasingly caring as much about how you fund the AI race… not just how fast you run it.

👀 And the AI earnings test isn't over: Amazon reports tonight, and Apple is up next… so stay tuned for Sunday’s recap!

🤖 P.S. If you want a quick audit of your portfolio (and personalized daily and weekly news recaps tailored to your holdings), make sure to check out Beevis, Blossom’s AI portfolio assistant, which I’ve personally spent extensive hours training (so it should have a similar tone and vibe to the buzz 🐝)!

IN OTHER NEWS
🗞️ The Other Big Stories of the Week

📰 It's been a massive week beyond Google and Microsoft too, so here are the quick hits:

• 🏦 The central banks made split decisions yesterday, with the Fed holding rates steady at 3.75%-4.00% while the Bank of Canada hiked by 0.25%, warning that oil-driven inflation could hit ~3.5% by year-end and that more hikes may be needed

• 🤖 Anthropic officially filed for its IPO on Monday (ticker: ANT), revealing revenue of $16.3 billion in the first half of 2026 (up from $1.2 billion a year ago) and a $131.7 billion cash pile… with the WSJ reporting a debut in mid-November at a valuation of $1.5-2 trillion

• 💰 Oracle ($ORCL) jumped +11% after saying its capex will peak this year and next, pledging to raise no more than $20 billion in extra financing through fiscal 2030, and targeting positive cash flow by 2028… more proof that the market is entering a "show me the money" era of AI

• 💳 The fintechs split on earnings: SoFi ($SOFI) soared +13% after a big beat and a raised outlook (now guiding to $5.04 billion in 2026 revenue, up 40%)… while Robinhood ($HOOD) fell ~8% after profits dropped 14% year-over-year on rising expenses, despite record trading activity

🙏 And that’s all for now! Thanks for reading to the end 😊

-Max, CEO of Blossom