J.P. Morgan: Alphabet search growth drops sharply, while cloud revenue doubles but cannot offset near-term profit pressure

Why is revenue growth slowing as search volume accelerates?

In the third quarter of 2026, Google Search and other revenue rose 12% year over year, below the second quarter’s 16.8% and the 13%–14% previously discussed by investors. Over the same period, year-over-year growth in search queries rose to its highest level in five years.
Management said exchange rates were the biggest factor in the slowdown. JPMorgan estimates that the currency impact on search revenue growth shifted from a tailwind of about 1 percentage point in the second quarter to a headwind of about 0.8 percentage points in the third quarter; a higher prior-year comparison base also added pressure.
The EU’s removal of the tax exemption for small parcels affected Asia-Pacific retailers, while media and entertainment advertising spending boosted by the second-quarter World Cup is returning to normal. Meanwhile, Google says most AI Mode queries represent new demand, but monetization remains below that of traditional search, which could also widen the gap between usage and revenue growth.

JPMorgan expects the year-over-year comparison base for search revenue to keep rising through the first quarter of 2027, with a slightly greater currency headwind in the fourth quarter than in the third. It is also unclear when Asia-Pacific retailers affected by the tax exemption change will recover.
The bank’s model forecasts that Search and other revenue will grow 9% year over year in both the fourth quarter of 2026 and full-year 2027. Google is expanding ad coverage across AI Overviews and AI Mode, but improving AI Mode monetization will take time.

Third-quarter Google Cloud revenue rose about 103% year over year, slightly above JPMorgan’s 100% forecast, with growth in both AI and the core cloud platform business. The bank estimates that core cloud platform revenue still grew about 80% excluding approximately 3 billion dollars in TPU system sales.
Cloud backlog rose by 47 billion dollars quarter over quarter to 561 billion dollars, with just over 55% expected to convert to revenue over the next 24 months. TPU system contracts are first recorded in backlog; Google then procures inventory and recognizes revenue only upon delivery.
The company expects the TPU contribution to expand in the fourth quarter and grow more noticeably in 2027. JPMorgan forecasts cloud revenue growth of 107% year over year in 2027 and expects it to exceed search revenue in the first half of 2028.

The cloud operating margin was 36.2% in the third quarter, above JPMorgan’s forecast, but the Google Services margin was below its forecast; the bank said slower search growth and legal expenses may have contributed. Alphabet’s GAAP earnings per share were 2.12 dollars for the quarter, below the bank’s forecast of 2.97 dollars.
The company maintained its 2026 capital expenditure guidance of 195 billion–205 billion dollars and expects a significant increase in 2027. JPMorgan forecasts capital spending of 379 billion dollars in 2027, up 86% year over year; TPU inventory purchases will further reduce free cash flow.
The company only began using third-party interim computing capacity at the end of the third quarter. Expanded use in the fourth quarter will weigh more noticeably on near-term margins; depreciation and data center operating costs associated with infrastructure expansion will also increase.

The bank believes the headwinds facing search are manageable rather than permanent structural problems, and expects cloud to drive Alphabet revenue growth of about 30% in both 2027 and 2028.
JPMorgan maintained its Overweight rating but cut its GAAP earnings per share forecasts for 2027 and 2028 by 5% and 2%, respectively, and lowered its price target from 425 dollars to 375 dollars. The new target is based on approximately 22 times projected 2028 earnings per share of 17 dollars.