$GOOGL · Dividendology · 2026-10-28

Google's shares fell in after-hours trading after the release of its latest quarterly earnings report, where it failed to meet targets for both revenue and profit. Share prices fell about 11% in after-hours trading. this is the first time since April 2026 that the stock is trading below $300.

what does this mean for the stock in terms of valuation? What does this mean in terms of future income? What actually happened in their income report? And what is the future capital expenditure (capex) for this stock actually going to be ?

GAAP earnings per share in the third quarter were $2.12, 89 cents below expectations. That is, this is a pretty big deficit.

revenue, although it grew by about 25% year-over-year — which is significant growth — was still about $330 million short of the target. where is the growth for this stock actually coming from?

we can see again that revenue growth was really strong, as we mentioned earlier. It has grown by 25% year-on-year.

Google search, the main part of the business, has grown by about 12%. This is the fastest growth seen in search queries in the last 5 years. But the real growth came from elsewhere.

That is Google Cloud. Google Cloud saw 103% year-over-year growth in the last quarter.

And this is probably the strongest positive for Google right now. Google clearly has avenues to monetize beyond consumer products, from AI infrastructure and enterprise services.

why was there such a large deficit in Gap EPS ? One reason for this was losses from equity securities, which reduced reported EPS by 55 cents. This is certainly a major cause of the shortage, but it is not the only cause.

Google Search, as we saw earlier, grew 12% year over year , YouTube Ads grew about 9%, Google Network grew 1%, and Subscriptions, Platforms and Devices grew about 11%.

Overall, this was about 11% growth, but keep in mind that last year, year-on-year growth was about 14% in the third quarter of 2025. So, they are still achieving double-digit growth , but it is down slightly compared to the third quarter.

one thing you have to keep in mind is that this search revenue is growing at a rate of 12% , which seems good on the surface, but it's down from 17% last quarter. So, remember this warning.

this is not to say that everything I mentioned is the main reason for this huge sell-off in Google shares. In the second quarter of 2026, we saw Google experience their first negative free cash flow quarter.

And honestly, it wasn't a big surprise, but we saw it happen again in the third quarter of 2026.

Another big drop in free cash flow, and it's no secret what caused it. This is due to their heavy capital expenditure.

We see that capital expenditure continues to increase. In the third quarter of 2026, Google reported capital expenditures of $51 billion in a single quarter. This is an increase of more than 114% compared to last year.

Why is this such a big deal? Well, basically, if we go to the free cash flow sheet, let's look at it in more detail. If we zoom in, we can get a better look at the Google stock.

Free cash flow is basically your operating cash flow minus capital expenditures. And in the long run, if free cash flow continues to grow , that's what drives share prices up. Why?

Well, think about what a company can do with free cash flow. They can reinvest in the business. They can pay down debt , do mergers and acquisitions , buyback shares, and yes, pay and increase dividends over time.

But, we are now seeing that Google is moving towards negative free cash flow due to heavy capital expenditure. So, the main concern is that Google's expenses are growing much faster than the cash its business generates.

And in my opinion, this is reasonable. When your capital expenditure increases by 114% per year, while revenue increases by 24.7% , the ratio becomes unbalanced.

And the interesting thing is that when you look at reports like S&P Global, which estimate what Google's capital spending will be over the next few years , you see that it is likely to increase significantly.

For example, total capital spending could reach about $202 billion in 2026.

To put this into some context, let's go to our profitability sheet and look at Google. The data will load courtesy of TIKR data, link provided in the description , but what we can see is that revenue in 2025 was around $400 billion.

So basically, based on 2025 revenue, which is revenue, not earnings, 2026 capital expenditure was about 50% of 2025 revenue.

If we take it one step further , let's go down here, look at net income. Net income in 2025 was $132 billion. So, capital expenditure in 2026 is more than Google's net income in 2025. I mean, they are fully investing in AI.

And in 2027, capital spending is forecast to increase by another 50% compared to 2026 to exceed $300 billion, and by 2028, we will reach a peak capital spending of about $353 billion.

And it is expected to remain above $300 billion for the next few years.

So, Google will likely remain in a negative free cash flow position for the foreseeable future, at least for the next three to four years. And this is certainly a big concern.

Now, believe it or not , from a valuation perspective, Google is now trading around $287 after a huge drop. And the future EPS forecast is around $20.60. So, if we look at that forward P/E multiple , it's pretty impressive.

They are trading at around 13.93 times earnings. Of course, assuming they achieve those forward EPS.

However, there is a caveat to trading at this valuation. See what Google's EPS projections look like for the next few years. In 2027, it is expected to be around 15.17. 18.32 in 2028.

21.77 in 2029. So, the reality is that using 2026 EPS estimates is not a very good way to look at this stock's valuation multiple. For example, the forward P/E multiple for 2027 is around 20.89.

So, fundamentally speaking, their business segments are performing incredibly well when it comes to Google stock. Google search is still going well. Google Cloud is incredible.

But, the concern is that Google's spending is getting out of control, even more so than stocks like Microsoft or Meta. And there are no signs of relief in the next few years.

So, Google has now become a very risky investment. And that doesn't mean it won't be successful. However, there is no doubt that it is a potentially higher- risk, higher- return investment compared to other technology stocks.

At least based on the capital expenditure projections we're seeing and how long free cash flow will remain negative.