Google has a problem: shares plunge 10%
$GOOG shares are plunging dramatically! Down 10% right after earnings. Google posted its best cloud results ever, yet its stock is plunging 10%—a case of AI killing Google’s business from within.
At first glance, it looks like a paradox. Alphabet just reported revenue of 127,6 billion dollars (+25%), and Google Cloud doubled revenue to 30,7 billion dollars (+103%). But the market isn’t judging whether Google is winning in AI. It’s judging how much that victory will cost and what’s happening to the core business in the meantime. Even before earnings, there was talk that AI itself could be hurting Google somewhat.
Cloud
A year ago, Cloud accounted for roughly 15% of Alphabet’s revenue; today it’s 24%.
Cloud’s operating margin rose from 23,7% to 36,2%, meaning Cloud generated approximately 11 billion dollars in operating profit, roughly 3 times more than a year ago. Cloud is therefore responsible for about 80% of the group’s total year-over-year growth in operating profit.
Backlog—the contracts already signed—reached 561 billion dollars. A year ago, it was 155 billion. Most of that is expected to translate into revenue over the next 24 months. That’s a fairly confident claim.
Google has also started selling its TPU chips as complete systems directly to customers’ data centers. It’s one of the few real alternatives to Nvidia, and that’s one reason Google can’t keep up with demand. Since the end of the quarter, it has even been renting computing capacity from third parties.
The core business is slowing... And that’s the problem
Search brought Google 63,4 billion dollars, but growth slowed to 12% from 17% in the previous quarter and 19% at the start of the year. Analysts had expected roughly 65 billion.
People aren’t stopping their use of Google—in fact, the opposite is true. The number of queries is growing at its fastest pace in 5 years. But a large share of the new growth is coming through AI Mode, which is currently harder to monetize than traditional search with ad links. Google isn’t cannibalizing its users; it’s cannibalizing its ad monetization. As I wrote, the market was worried about this, and those fears have been borne out.
Management says most queries in AI Mode are new and that it’s now scaling ads there. This will be the most important metric over the next few quarters.
YouTube also slowed. Advertising grew by just 9% to 11,2 billion dollars, missing estimates. At least subscriptions are a bright spot. YouTube Music and Premium have over 150 million subscribers, and YouTube is gradually shifting from a purely ad-supported model toward Netflix’s $NFLX business, with advertising on top. Conversely, Google is disrupting Netflix’s business, whose shares are down 53% from ATH.
Cash flow
Alphabet invested 51,4 billion dollars during the quarter—more than it earned from Cloud altogether. Free cash flow came in at -9,1 billion dollars, for the second consecutive quarter. Last quarter was the first time this had happened since Google went public.
A company that for years poured tens of billions a year into buybacks is now borrowing money. Long-term debt rose from 21,6 to 125,1 billion dollars in a year, and in June Alphabet announced a 80 billion dollar capital raise, including 10 billion from Berkshire Hathaway $BRK-B.
The investment outlook for 2026 is currently 195 to 205 billion, so it hasn’t been raised, and management promises another significant increase in 2027. I’ve read figures like 300 billion or more being floated... brutal.
And on top of this debt “problem,” we have the Fed, which is indecisive. Although it held rates steady today, there’s currently a 78% chance that rates will be raised at the December meeting. That’s obviously not good for further borrowing, since it will come at a higher interest rate. Money is expensive now, after all.
Watch out for the EPS drop
Earnings per share fell to 2,12 dollars from 2,87 dollars. Much of the decline, however, was caused by an accounting loss of around 8 billion dollars from the revaluation of Alphabet’s stake in SpaceX $SPCX.
In the previous quarter, the same mechanism instead inflated earnings by 98 billion. Google’s EPS is therefore now highly dependent on how its investments move. Operating profit is a much better indicator, and it rose 30% to 40,6 billion dollars. Even adjusted EPS missed estimates, though.
So, what’s next?
Alphabet is currently the only company with the entire AI stack under its control “in-house”:
- its own chips (TPU)
- state-of-the-art AI models (Gemini 4)
- cloud services sold to businesses
- distribution to billions of people through Search, YouTube, Android, and the Gemini app with 1 billion users
But $GOOG is paying for it. It’s transforming from a capital-light advertising machine into a capital-intensive company.
Because the company makes up several percent of the major indexes, after the Nasdaq technology market closed, it was down 0,3% and the S&P 500 0,2%.
That doesn’t change anything in my portfolio, though. Google will remain my largest position. I’ve held $GOOG shares in my portfolio for several years, with an average purchase price below $100. If the decline continues, I may buy some more. For now, I’ll probably play it through options. A quick recovery is also possible, as we saw after the last earnings report.
PS: You can expect content about options any day now. Everything will be ready soon. I’ll let you know.
