Alphabet Disappoints Wall Street Despite Record Results

Key Takeaways

• Alphabet reported third-quarter revenue of $127.6 billion, a 25% increase year-on-year.
• Net income fell by 25% to $26.2 billion, impacted by equity investment losses.
• Earnings per share (EPS) were $2.12, significantly below analyst expectations of nearly $3.00.
• Google Cloud revenue soared by 103% to $30.7 billion, with improved operating margins.
• Capital expenditures rose to $51.4 billion, leading to negative free cash flow.
• Shares dropped over 8% in after-hours trading, testing the $300 mark.

Detailed Financial Results

Alphabet's third-quarter results showcased a revenue of $127.6 billion, marking a 25% year-over-year growth and continuing its streak of double-digit revenue growth for thirteen consecutive quarters. However, this figure fell slightly short of analysts' expectations of around $128 billion.

Operating income rose by 30% to $40.6 billion, with the operating margin improving from 30.5% to 31.8%. Despite these positive indicators, net income saw a significant decline of 25%, landing at $26.2 billion. This downturn was largely due to an $8.7 billion loss on equity investments, which negatively impacted earnings per share by $0.55. Alphabet did not specify which investments contributed to this loss.

Segment Performance

The standout performer was Google Cloud, which reported a remarkable revenue increase of 103%, significantly surpassing the previous quarter's growth of 82%. This surge in revenue was accompanied by a jump in operating income from $3.6 billion to $11.1 billion, with the operating margin climbing from 23.7% to 36.2%. This indicates that the AI boom is translating into both higher sales and improved profitability for the segment.

In contrast, Google Search revenue grew by 12% to $63.4 billion, while YouTube Ads revenue increased by 9% to $11.2 billion. Notably, despite the rise of competing AI chatbots, Google experienced its fastest growth in search queries in five years, with the Gemini app surpassing one billion monthly active users.

Investment and Cash Flow Concerns

To maintain its competitive edge in technology, Alphabet invested heavily, with capital expenditures reaching $51.4 billion in Q3, more than double the previous year's amount. This led to negative free cash flow of $9.1 billion, as capital spending exceeded operating cash flow. The company raised approximately $28.7 billion through bond issuance and $12.4 billion through equity issuance, indicating a strong reliance on external financing.

Alphabet's guidance for capital expenditures for the full year 2026 is between $195 billion and $205 billion, suggesting a need for an additional $63 billion to $73 billion in Q4 alone. The market's reaction to the earnings report reflects a growing skepticism among investors, who are increasingly focused on EPS performance, cash flow deterioration, and the risks associated with rising capital expenditures.