On Tuesday, Alphabet closed at $324.89. It was down more than 10% by Wednesday morning, trading at about $289 in the premarket. The business recently revealed quarterly revenue of $127.6 billion, which represents the fastest growth rate since 2021 and a 25% year-over-year increase. Operating revenue increased by 30%. Google Cloud has more than doubled. Nevertheless, the stock was declining so sharply that Nasdaq futures fell along with it. There should be an explanation for such a disconnect, and in this instance, there are multiple ones.
Search is the most direct. In contrast to Wall Street’s estimate of $64.9 billion, Google’s search advertising revenue for the quarter was $63.4 billion. In isolation, that disparity doesn’t sound disastrous, but context is important. For more than 20 years, search has been Google’s main source of revenue. For years, the company has been concerned that AI-powered alternatives, such as conversational tools, generative responses, and agentic workflows that completely avoid the search page, would eventually erode that business. Although the true severity of the threat is still unknown, a search miss in this setting has a different impact than it would have in 2019. As this develops, investors are seeing a signal rather than just a quarterly figure.
Confusion was further increased by the earnings per share figure. Alphabet reported diluted EPS of $2.12, a 26% decrease from $2.87 the previous year. The $8.7 billion unrealized loss on equity securities, which was mostly caused by the drop in SpaceX’s share price during the third quarter, was the cause, as CFO Anat Ashkenazi explained during the earnings call. After deducting about $0.55 from earnings per share, the reported figure fell well short of the $3.01 that analysts had predicted. It’s interesting to note that Ashkenazi mentioned SpaceX on the call, but Alphabet never specifically mentioned it in their own filing. When SPCX declined during the quarter, Alphabet appears to have a sizable stake in SpaceX, and that paper loss was reflected in the income statement. After removing it, Alphabet made about $2.67 per share, which is still less than the consensus but presents a significantly different picture.
The real standout was Google Cloud. That division generated $11.1 billion in operating income with revenue of $30.7 billion, up 103% from the previous year. This indicates that the cloud unit now turns over one-third of its revenue into profit, a margin profile that would make the majority of independent cloud companies jealous. On social media, CEO Sundar Pichai announced that search query growth is at its highest annual rate in five years and that Gemini, Alphabet’s AI model, has now reached one billion users. These metrics do not indicate that a company is losing the AI race. And yet.
Free cash flow, which turned negative $9.1 billion for the quarter compared to an estimate of roughly negative $2.7 billion, was the figure that undoubtedly worried investors the most. The quarter’s capital expenditures totaled $51.4 billion, more than twice as much as the previous year. Alphabet stated that spending would rise dramatically in 2027 after guiding full-year 2026 capital expenditures at $195 billion to $205 billion. For the upcoming year, some analysts have projected amounts exceeding $300 billion. At that level of investment, there are legitimate concerns about how and when it will pay for itself, and the market is obviously beginning to demand better answers. There seems to be less tolerance for “trust the infrastructure build” than there was even six months ago.
After-hours trading saw an increase in Microsoft, which released its report that same evening. Adjusted earnings exceeded projections, its Azure cloud expanded by 48%, and its stock moved against Alphabet’s. It was hard to ignore the contrast. Two businesses that made significant investments in AI, reported record revenue within the same 24-hour period, and got entirely different responses. It’s possible that Microsoft’s spending story feels more restrained at the moment or that its short-term results are easier to understand. It’s also possible that Microsoft offered the exit because investors needed a place to switch after punishing Alphabet.
In June, during his first net buying quarter in more than three years, Warren Buffett opened a $10 billion position in Alphabet, which appeared to be a sign regarding valuation. GOOGL is trading at about 16 times trailing earnings at $290, which is not expensive by historical standards for a business expanding at a rate of 25%. The most important question at hand is whether the search slowdown is a result of transient friction or something more structural, and the Q3 report failed to address this. It simply made it more difficult to ignore.
