- Alphabet missed on both lines for the first time in almost four years. Third-quarter revenue rose nearly 25% to $127.6 billion but trailed the $128.2 billion LSEG consensus, adjusted EPS fell 7% to $2.67 against $3.02 expected, and the shares dropped close to 10% in after-hours trading.
- Advertising is the problem. Revenue in the services division, mostly ads, came in at $96.3 billion versus $98.5 billion expected, a shortfall of about $2.2 billion (Lumida calculation). Total ad revenue rose 10.5%, far behind the 26% ad growth Meta reported, and Search revenue growth slowed for a second straight quarter even as queries grew at their fastest pace in five years.
- Management tied part of the slowdown to AI. Chief Business Officer Philipp Schindler said strong growth in AI Mode queries “had an impact because of the lower monetization we are seeing in AI mode,” while D.A. Davidson’s Gil Luria said “the burden of proof is now on Google” to show search is not in permanent decline.
- Cloud was the bright spot, but spending keeps climbing. Google Cloud revenue doubled to $30.71 billion and its backlog rose to $561 billion from $514 billion, yet free cash flow was negative $9.07 billion and CFO Anat Ashkenazi signaled 2027 capex will rise significantly, with the CNBC Investing Club expecting it to top $300 billion.
What Happened?
Alphabet reported third-quarter results Wednesday evening. Operating income rose 30% to $40.6 billion and operating margin widened 1.3 percentage points to 31.8%, but both missed estimates. The company kept its 2026 capital spending forecast at $195 billion to $205 billion, said roughly 65% of third-quarter capex went to servers and networking gear, and attributed part of the negative free cash flow to a $5.2 billion European Commission fine payment and a build-up of TPU inventory. The Gemini app now has more than 1 billion monthly active users, and token usage across first-party models grew about 40% from the prior quarter.
Why It Matters?
The report puts the AI-cannibalization debate at the center of Alphabet’s story. The company still sees search queries growing, but if answers shift into AI Mode and chatbots that carry fewer ads, its most profitable business could grow more slowly just as capital spending rises. Alphabet ended the quarter with $265.1 billion of cash and marketable securities against $125.1 billion of debt, and the CNBC Investing Club noted about $27 billion remains on its $40 billion at-the-market equity program, meaning the company can keep selling stock to fund the build-out.
What’s Next?
Analysts are expected to revise estimates on Thursday, and the next test is whether expanded ads in AI Mode, including international rollout and multi-turn ads in the US, close the monetization gap. The stock was already about 30% below its May intraday high of roughly $408 and trades near 20 times forward earnings, so investors will weigh valuation against the risk of further estimate cuts. Amazon’s results on Thursday will offer another read on cloud demand.
Affected Tickers and Coins: GOOGL, GOOG, META, AMZN
Source: CNBC, CNBC Investing Club
