Alphabet’s third-quarter search growth slows as cloud revenue doubles; computing costs and investment losses weigh on profit
Search revenue growth fell from 17% in the previous quarter to 12%. Cloud revenue beat market consensus but fell short of some buy-side thresholds; services margins declined sequentially for a second straight quarter, and free cash flow turned negative.
Original source：BernsteinFirst published on Unhidea：Original source date：
Key takeaway
Bernstein says Alphabet’s cloud growth and AI usage were impressive, but slowing search monetization, rising computing costs and investment losses meant there were more negatives in its third-quarter results.
Why didn’t growth in search volume translate into faster revenue growth?
Alphabet’s third-quarter revenue totaled 127.577 billion dollars, up 25% year over year and slightly below the market consensus of 127.933 billion dollars. Search and other revenue was 63.35 billion dollars, up 12% year over year and approximately 2% below market consensus.
Search growth slowed from 17% in the second quarter to 12%, also below the approximately 15% threshold cited by Bernstein. Management also said search query volume recorded its fastest growth in five years.
Bernstein asks why query volume did not translate into revenue as it had in the previous several quarters, and whether AI product interfaces and agents are affecting search queries that are easier to monetize.
Cloud revenue doubled. Why do questions remain?
Google Cloud’s third-quarter revenue was 30.709 billion dollars, up 103% year over year and approximately 6% above market consensus. But Bernstein says some buy-side investors had expected growth above 115% before the earnings release.
Cloud operating profit was 11.121 billion dollars, with an operating margin of 36.2%, above the approximately 24% recorded a year earlier. Bernstein is focused on Google Cloud Platform’s growth excluding Workspace and TPU system sales, and whether new capacity can ease potential capacity constraints.
AI usage continued to rise: the Gemini app had more than 1 billion monthly active users, and first-party models processed 32 billion tokens per minute, up from 22 billion in the second quarter. Google also launched Argon and Carbon versions of Gemini 4; Bernstein believes they have returned to the frontier, but questions their readiness for commercial deployment.
Why didn’t revenue growth translate into stronger profit and cash flow?
Google Services’ third-quarter operating margin was 40.7%, below approximately 42% in the second quarter and down sequentially for a second consecutive quarter. Bernstein notes that computing costs continue to permeate the core business and is watching for further margin pressure from model improvements, agents and competitive spending.
Group operating profit was 40.576 billion dollars, approximately 6% below market consensus; diluted earnings per share were 2.12 dollars, below the consensus of 2.99 dollars. Bernstein attributes the earnings-per-share miss mainly to lower-than-expected operating profit and a 8.7 billion dollar loss on equity securities; excluding that loss, earnings per share were 2.69 dollars.
Third-quarter capital expenditure was 51.355 billion dollars, and free cash flow was negative 9.065 billion dollars, below the market expectation of negative 3.491 billion dollars.
How does Bernstein value Alphabet?
Bernstein rates Alphabet “Market-Perform,” with a target price of 385 dollars, implying approximately 19% upside from the 324.89 dollar closing price listed in the report.
The target price gives each of two methods a 50% weight: an enterprise value-to-operating profit multiple of 24 times for 2027 estimates, and a discounted cash flow model. The latter uses a weighted average cost of capital of 10% and a perpetual growth rate of 3.5%.
