Why was cloud the highlight of the quarter?

  • In the third quarter of 2026, Google Cloud revenue was 30.7 billion dollars, up 102.6% year over year, exceeding both the second quarter’s 82% and Citi’s prior forecast of 91%; revenue was about 7% above market consensus.
  • Cloud operating profit was 11.1 billion dollars, above the market consensus of 9.7 billion dollars; its operating margin was 36.2%, up 12.5 percentage points year over year. Citi believes this shows that TPU sales are helping to improve cloud margins.

What changed in search and YouTube growth?

  • Search and other revenue was 63.4 billion dollars, up 12% year over year, below both the second quarter’s 16.8% and Citi’s prior forecast of 15%; revenue was about 2.5% below market consensus.
  • YouTube advertising revenue was 11.2 billion dollars, up 9.2% year over year, slowing from 15.7% in the second quarter; revenue was about 2% below market consensus.
  • Google Services total revenue was 96.3 billion dollars, up 10.6% year over year and about 2% below market consensus. The segment’s operating margin rose 2.2 percentage points year over year to 40.7%, but was below Citi’s forecast of 43%.

Why was overall profit below consensus despite the cloud beat?

  • Alphabet’s third-quarter total revenue was 127.6 billion dollars, up 25% year over year excluding the impact of currency movements, in line with the FactSet market consensus. Cloud outperformance coincided with search and YouTube falling short of expectations.
  • The company’s overall operating profit was 40.6 billion dollars, with an operating margin of 31.8%; operating profit was about 6% below market consensus. GAAP earnings per share were 2.12 dollars, below the consensus of 3.03 dollars.

How does Citi view investment and valuation?

  • Third-quarter capital expenditure was 51.4 billion dollars, up 6.4 billion dollars quarter over quarter, but about 10% below Citi’s forecast. Citi is watching how computing capacity will be allocated across businesses and the level of capital expenditure in 2027.
  • Citi maintained its buy rating and 447-dollar price target, based on its forecast of 15.87 dollars in GAAP earnings per share for 2027 and a price-to-earnings multiple of about 28 times. The bank believes accelerating cloud revenue driven by TPU and Gemini demand, together with persistently strong search query volumes, can support a valuation above market and Alphabet’s historical levels.