Alphabet shares fall 2% on report Gemini 3.5 Pro lags rivals
Alphabet shares fell 2% after a report that its Gemini 3.5 Pro model is months behind schedule, raising concerns that the company's massive $187 billion capital investment is failing to keep pace with OpenAI and Anthropic.
Alphabet shares declined 2% in early Friday trading after a Bloomberg report stated the company's Gemini 3.5 Pro flagship AI model is "months behind schedule". The development threatens to sideline the search giant in the critical artificial intelligence race against competitors OpenAI and Anthropic.
The primary technical bottleneck remains coding capability. Alphabet's engineering teams are reportedly frustrated that Gemini 3.5 Pro continues to lag rival models in writing software. Building a competitive coding model requires significant compute resources, but Alphabet is simultaneously trying to satisfy the diverse requirements of internal stakeholders across Google Search, Google Maps, and YouTube with a single underlying architecture.
External pressures are adding to the timeline. The US government has intervened, demanding the ability to test and approve bleeding-edge AI models before they reach the market. Regulators want to ensure these systems do not pose security risks to other companies, creating a bureaucratic hurdle that slows down deployment.
Capital expenditure squeeze
For market professionals, the operational delay amplifies existing concerns about Alphabet's deteriorating cash conversion. Analysts surveyed by S&P Global Market Intelligence forecast the company's capital investment will approach $187 billion this year. This massive outlay is expected to consume nearly all of the $212 billion in cash from operations Alphabet is projected to generate.
The consequence is a severe contraction in free cash flow. Alphabet is left with only about $25 billion in positive free cash flow under current estimates. That figure marks a dramatic decline, equating to barely one-third of the roughly $73 billion in free cash flow the company generated last year.
This financial dynamic frames the stock's immediate downside risk. Alphabet is committing historic levels of capital to AI infrastructure. If those investments yield models that remain months behind the competition, the return on invested capital will fall short of market expectations. Investors are currently pricing in the possibility that this heavy spending will not translate into a dominant AI market position.
