Alphabet Disappointed the Market. Why Its Stock May Still Be Attractive to Investors
Following the release of the earnings report, at least 25 teams of investment analysts lowered their price targets for Alphabet stock. Photo: Unsplash / Alban
Alphabet disappointed investors this week with its third-quarter earnings report and lost nearly half a trillion dollars in market capitalization. Following the release of the report, at least 25 teams of investment analysts lowered their price targets for the company’s stock. But some are convinced that the drop in the stock price could present an attractive entry point over the next 12 months. What, in their view, will drive Alphabet’s recovery?
AI is putting pressure on cash flow
Revenue for Alphabet, Google’s parent company, rose 25% year-over-year in the third quarter, reaching $127.6 billion. Earnings per share fell by more than 26% to $2.12. Both figures fell short of analysts’ forecasts. They had expected revenue of $128.2 billion and earnings per share of more than $3.
Revenue from Google's advertising business, including search and YouTube, totaled $82 billion (analysts had expected the figure to be $83.5 billion).
Investors also took note of the company’s free cash flow, which was negative for the second consecutive quarter. Analysts had expected this figure to be close to zero. During a conference call with investors and analysts, the company itself attributed this trend to increased capital expenditures on AI. These expenditures reached $51.4 billion, more than double the amount from a year ago.
In addition, the company was let down by its investments in Elon Musk’s SpaceX. Alphabet owns approximately 551 million shares in that company. According to Oninvest’s calculations, as of June 30, the market value of this stake was $94.2 billion, and it declined by approximately $11.3 billion during the third quarter. The connection to SpaceX poses another risk for Alphabet, BofA analysts noted. They estimate that Google’s parent company spent approximately $3 billion on computing power for Elon Musk’s space venture. Thus, the decline in the value of the SpaceX stake is weighing on profits, while the expenses for computing power are weighing on free cash flow.
As a result, investors sold off Alphabet shares. On October 29, the day after the earnings report was released, the company’s stock lost more than 12% of its value, and its market capitalization fell by approximately $500 billion. It was the worst day in the company’s trading history.
Market Optimists
Despite the pessimism on Wall Street, Angelo Zino, a senior analyst at CFRA Research, believes that the decline in Alphabet’s stock price could prove to be a good entry point over the next 12 months.
He raises two questions to assess the company’s prospects: Will Google Cloud maintain its current growth rate, and what role will Gemini play in this (the AI model could encourage enterprise customers to use Google’s cloud services more actively and purchase computing power)? In other words, will Alphabet be able to turn the growing use of AI into sustainable revenue and cash flow to recoup its major infrastructure investments?
In the third quarter, Google Cloud’s revenue increased by 103% year-over-year to $30.7 billion. Alphabet does not disclose revenue from Gemini. In a statement accompanying the earnings call, the company noted that the app has reached 1 billion users and has become the fastest-growing product in Google’s history. During the October 28 earnings call, Google Cloud CEO Thomas Kurian stated that Gemini usage is generating additional revenue.
Seeking Alpha analyst Jonathan Weber notes that Alphabet shares are currently trading at a forward P/E ratio of about 19, or roughly 19 times projected annual earnings per share. This is significantly below the company’s historical levels, which, in his view, makes the stock attractive for long-term investment.
Dave Wagner, a portfolio manager at Aptus Capital Advisors, noted in comments to Reuters that Alphabet’s cloud business “has been driving the whole story, but until the search business demonstrates that AI complements the existing business model rather than undermining it, the stock will likely continue to decline.”
Morgan Stanley analysts believe that a revaluation of Alphabet’s stock could begin in 2027 if the company is able to scale up its AI agents and accelerate their revenue growth. For now, the investment bank has lowered its price target for Alphabet shares from $400 to $375, but has maintained its “Outperform” rating.
As of October 30, 2026, at least 25 investment firms had lowered their price targets for Alphabet shares. In most cases, however, they maintained their positive ratings.
Analysts at Cantor Fitzgerald cut their price target the most—from $420 to $350—followed by Bernstein, which lowered its target from $385 to $325, and D.A. Davidson, which reduced its target from $350 to $300. This is also the lowest price target at the moment. However, none of the three firms recommended selling Alphabet shares: Cantor Fitzgerald maintained its “Outperform” rating, while Bernstein and D.A. Davidson maintained neutral ratings.
Following the release of the earnings report, Citizens analyst Andrew Boone downgraded his recommendation on Alphabet from “Outperform” to “Neutral,” citing the risk that AI agents will continue to divert traffic that previously generated advertising revenue for the company.
What Risks Should Google Consider for the Future?
In fact, one of the risks is related to the Google search engine. For Alphabet, revenue from search services rose 12% in the third quarter to $63.35 billion, and the company reported a five-year high in the number of search queries. However, the proportion of answers that users receive directly from AI—without visiting advertisers’ websites—is also growing. Philip Schindler, Chief Financial Officer of the Commercial Division, acknowledged that the rapid growth in queries in AI Mode has slowed the growth of search revenue due to lower monetization compared to traditional search.
Another risk is a further significant increase in capital expenditures in 2026 and 2027. The company’s CFO, Anat Ashkenaz, warned of this during a conference call on October 28. Alphabet has maintained its investment forecast for 2026 in the range of $195–205 billion. Analysts at Bank of America estimate that the figure will be approximately $300 billion next year, while the consensus forecast cited by MarketWatch exceeds $310 billion.
The final significant risk is the concentration of demand for cloud services with a single customer. In a note dated October 20, Scotiabank analysts estimated Anthropic’s obligations to Google—as the company prepares for its IPO—at $111.1 billion. This represents about 22% of Google Cloud’s total order portfolio. The experts noted separately that it is unclear whether all of Anthropic’s commitments are included in the published portfolio; therefore, Scotiabank’s calculation only illustrates the potential scale of dependence on a single major client.
This article was AI-translated and verified by a human editor
