Why did search fall short of expectations?

  • In the third quarter of 2026, Google Search and other revenue was $63.35 billion, up 12% year over year but below Goldman Sachs’s estimate of $64.2 billion and the market consensus of $64.9 billion; it rose just 0.1% quarter over quarter.
  • Management attributed the slowdown primarily to foreign-exchange headwinds. Search revenue growth also accelerated starting in the third quarter of last year, creating a higher year-over-year comparison base this year. Some Asia-Pacific retailers were affected by the EU’s removal of the tax exemption for low-value parcels, while media and entertainment advertising spending normalized after the World Cup.
  • Management expects foreign-exchange headwinds to be slightly greater in the fourth quarter than in the third, and the high comparison base to persist. Goldman Sachs lowered its fourth-quarter forecast for Search and other revenue from $70.64 billion to $69.07 billion.

What is constraining cloud growth?

  • Third-quarter Google Cloud revenue was $30.71 billion, up 102.6% year over year and above Goldman Sachs’s estimate of $29.56 billion and the market consensus of $29.05 billion. Operating margin was 36.2%, above Goldman Sachs’s estimate of 33.0% and up about 12.5 percentage points year over year.
  • Enterprise AI demand is driving growth, with TPU system sales making a significant contribution. Nearly 100 customers currently use TPUs. The cloud backlog reached $561 billion, up 256% year over year; the company expects about 55% of it to convert to revenue over the next 24 months.
  • The supply of computing capacity limits further acceleration in cloud growth. At the same time, the company must allocate capacity among internal product development, external customer demand and frontier model research and development.

Why is there a gap between growth and profit and cash flow?

  • Third-quarter consolidated net revenue rose 27.1% year over year, but operating profit was $40.58 billion, below Goldman Sachs’s estimate of $43.35 billion. Earnings per share were $2.12, below the bank’s estimate of $2.96, and included a loss of about $8.7 billion from changes in the value of the company’s equity holdings.
  • The company maintained its 2026 capital expenditure guidance at $195 billion to $205 billion and expects a significant increase in 2027. Goldman Sachs forecasts approximately $203 billion and $350.4 billion, respectively, to meet AI demand and ease computing capacity constraints.
  • Goldman Sachs expects operating cash flow of $190.4 billion and $309.8 billion in 2026 and 2027, respectively, below capital expenditure in those periods. It forecasts negative free cash flow of $12.6 billion and $40.6 billion, respectively. Management expects return on invested capital to remain well above the cost of capital, but continued investment will use cash.

Why did Goldman Sachs cut its price target while maintaining its buy rating?

  • Goldman Sachs lowered its 2027 earnings-per-share forecast from $15.50 to $15.01 and its 12-month price target from $435 to $385. It also reduced the enterprise value to operating profit multiple used in its valuation from 26 times to 24 times to reflect its lowered forward forecasts.
  • The bank remains positive on the broad user reach of Alphabet’s products and the scale of its computing capacity. AI can improve ad clicks and conversions, and management believes most AI Mode queries represent incremental demand at an early exploratory stage, with future monetization opportunities.
  • This view depends on the continued evolution of search revenue, conversion of the cloud backlog and returns on substantial investment. Goldman Sachs also noted that investment could pressure operating margins for longer than it forecasts.