Has the halo of AI faded? Alphabet's market value evaporated by $692 billion in three months, and investors are beginning to question the future of AI.

Has the halo of AI faded? Alphabet's market value evaporated by $692 billion in three months, and investors are beginning to question the future of AI.

Google, which was the star of the big tech stocks over the past year, is now facing a severe test as its AI narrative falters.

Since hitting an all-time high on May 13th of this year, Alphabet's stock price has fallen by 15% , wiping out $692 billion in market capitalization , making it the second-largest drag on the S&P 500 during the same period. The core pressures stem from two directions: the continued loss of key AI talent and delays in the development of its flagship model, Gemini 3.5 Pro, both of which have shaken investor confidence in Alphabet's leading position in the AI race.

The turning point for market sentiment came on August 5th. On that day, Jeff Dean, a key figure in Google's AI strategy, announced his departure to start his own business, taking several executives with him. Demis Hassabis also stepped down as CEO of Google DeepMind . Following the announcement, Alphabet's stock price plummeted 4% in a single day, wiping out $18.6 billion in market capitalization. Simultaneously, the company's $25 billion bond issuance completed in early August, along with its continuously rising capital expenditures and negative free cash flow, further exacerbated investor concerns.

Talent drain undermines AI leadership

Alphabet has been facing talent pressures for months. Several months ago, two Google executives jumped ship to Anthropic and OpenAI, respectively. Earlier this month, Jeff Dean's departure, along with the take of several key colleagues, brought this issue to the forefront.

Angelo Zino, Senior Vice President and Head of Technology Research at CFRA, stated: "This talent drain does pose a risk because it's an area everyone in the market is currently focused on—can you monetize AI?"

It is worth noting that the talent war among large technology companies is not a problem unique to Alphabet.

According to Bloomberg, Meta poached Ruoming Pang, head of Apple's AI model team, with a multi-year, $200 million compensation package; OpenAI attracted over 400 Apple employees with generous salaries and stock options, after which Apple sued OpenAI for stealing trade secrets. However, for Alphabet, the talent problem is just the tip of the iceberg.

Gemini delays exacerbate valuation pressures.

A more direct concern lies in the delayed development of Alphabet's most powerful AI model, Gemini 3.5 Pro. This model is still under improvement, particularly in terms of coding capabilities—precisely the area where Alphabet is considered to have fallen behind Anthropic and OpenAI. Two weeks ago, Google released a new version of the Gemini 3.7 Flash model, but made no mention of the Gemini 3.5 Pro's release timeline.

Janus Henderson analyst Divyaunsh Divatia points out, "If you're a winner in the AI sector, you have leading-edge models, and the market will give you a corresponding valuation premium. This is exactly the logic reflected in stock prices over the past nine to twelve months, but that premium has now diminished somewhat."

Google takes an optimistic view. A Google spokesperson stated, "Our AI momentum and product delivery speed are at all-time highs. The Gemini 3.7 Flash has become our fastest-growing model to date, and Gemma downloads have surpassed 1 billion."

High capital expenditures put pressure on free cash flow.

Financial pressures are equally significant. Alphabet's stock price fell after its earnings report at the end of July, precisely because investors were uneasy about its high capital expenditures and negative free cash flow. As previously reported by Bloomberg, the company announced spending plans of up to $205 billion, raising market concerns about runaway AI costs.

Divatia stated, " Capital expenditures will increase significantly next year, free cash flow will turn negative, the company has already issued new equity and is taking on substantial debt. This is what many investors are anxious about—the company is financing this AGI race through the equity and debt markets, which makes them uneasy."

This predicament is not unique to Alphabet. Investors across the tech industry are increasingly demanding that major AI companies demonstrate a return on their data center investments. The Nasdaq 100 index, dominated by tech stocks, has failed to reach new highs since May, and macroeconomic factors such as the Middle East situation, US-Canada trade friction, and persistent inflation leading to expectations of interest rate hikes are also continuing to weigh on market sentiment.

Divergence between bulls and bears; the next catalyst lies in earnings reports.

Despite the pressure on its share price, some investors remain optimistic about Alphabet's long-term prospects. Daniel Pilling, portfolio manager at Sands Capital Management, said that talent mobility might not be a bad thing: "Maybe it's a good thing. Maybe you need a new batch of people to try and get Google back to where it belongs. They have one of the best chips in the world, and probably one of the largest computing clusters in the world; they should be able to succeed."

Looking at a longer timeframe, Alphabet has still recorded a gain of about 65% over the past 12 months, outperforming the broader market and other members of the "Big Seven" tech giants.

However, market patience is waning. Melissa Otto, Head of Technology, Media & Telecom Research at Visible Alpha, stated, "I'm less concerned with who specifically; I'm more interested in how they articulate AI's performance on the next earnings call and how it will truly translate into fundamental growth. That remains, to some extent, an open question."

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