$GOOGL · Asymmetric Investing by Travis Hoium · 2026-10-28

Alphabet just reported earnings after the market closed and the stock's already down about 8% in after hours trading. I think there's a lot of sort of misunderstanding of what's going on with the numbers right now.

There was a one-time loss related to the company's equity positions. That's why the company is not meeting analyst expectations for earnings per share.

Not saying that without that there would have been phenomenal numbers, but there was a lot to like in this quarter. Now, this is my initial reaction. The conference call has not even started yet as I'm recording, so I'll probably be back later in the week with more thoughts on Alphabet.

including my position in Alphabet, which is up over about 100% at this point.

So, I like to look at the trailing 12-month numbers. What are the trends for Alphabet? And you can see here the trends are moving in the right direction. That's the I think highlevel takeaway from this earnings report. Things are still going well.

First thing that I looked at here, 25% growth for the company overall. That's phenomenal. That's actually about what the market was expecting. A lot of that growth is going to be driven by the cloud business.

This was a little bit of a surprise because they've actually had really good growth in search. So, that's up 12% from a year ago. And the cloud business up 103%. Gemini has a billion users. So, phenomenal momentum there.

And then they didn't give the growth number for YouTube. I'll get to that because I think that's ultimately really important. Look at the highle numbers. Like I said, 25% revenue growth.

It just think about this. This is a company doing hundred billion dollars worth of revenue per quarter and they're growing at 25% and the market is disappointed by that growth.

What the market is concerned about right now is these numbers right here. What you're seeing in a lot of the reporting is comparing analyst estimates, which was about $3 per share, to this $212 number.

That is not the right number to compare it to. The the correct number adds about 55 cents a share to that. So, we're looking at about $267 per share or so is what they're really reporting on an adjusted basis.

This is the big thing right here. A year ago they had a big gain in other income. Now they have a big loss. This is going to be related to a lot of the equity acquisitions that they have.

So the position in SpaceX, the position in Anthropic, both of those positions worth somewhere around hundred billion. So take this with a bit of a grain of salt because those are marked to market at the end of the quarter. That's why you have a big loss here.

So, the more important number I think is this one right here. Income from operations was up 30% from a year ago. Again, this is a multi-trillion dollar company growing revenue 25% in operating income is expanding.

Their margins are expanding. So, if you're a long-term investor like I am, that's something that you want to see.

The one that stuck out to me right here is general and administrative. They cut these costs by over a billion dollars in the past year. So this is some of the headcount re reductions that we've seen at Alphabet becoming a more efficient business.

Just really interesting to see how that's impacting their margins.

Now the offset to that is they're spending a ton more money on research and development. This is going to be the models that they're building. This is what's ultimately going to drive that cloud business.

So there's kind of a ying and a yang there. But I think from an operating perspective, they're doing pretty well.

Uh the Google services revenue and operating income. The way that they report things here is this is a bit essentially everything except for the cloud business and the other businesses.

So in blue the big segment here search that's going to be the big component. Green is YouTube. Red is Google network the ads that you may see all over the internet. This has actually been in decline over the past couple of years.

So I thought a little bit encouraging. This is actually growing 1% year-over-year.

And then subscription platform and devices. This is everything from Android to subscriptions you may pay for Gemini and other AI tools. A lot of things lumped into there.

But here's the context that I wanted to look at with this is search is actually growing faster than YouTube. So what this is telling me is that search is still monetizing really well and people are still searching.

Because if YouTube was growing faster than search, then that would be an indicator that you know what, advertising or advertisers are seeing more value in YouTube, which we know is still growing.

People are using YouTube more and more. People maybe aren't using search as much, not monetizing nearly as well because they're not getting the value out of that. But that's not what we're seeing.

We're seeing the exact opposite in the numbers. I'm surprised that search is growing faster than YouTube at this point. So, I took that as a little bit of a positive in the results.

But here's the other thing. operating margin in the segment expanded more than two percentage points. So, search is still a double-digit growth business. Keep that in mind. This is a business that is supposed to be disrupted right now and is still growing at double digits and has expanding operating margins. Again, that's exactly what you want to see.

Here's the cloud business. The numbers are a little bit crazy in the cloud business. $30.7 billion worth of revenue. That is up 103% year-over-year. I believe that beat uh Wall Street's estimates.

The operating margins are also crazy. 36.2%. Remember, it wasn't all that long ago that this was a business that was losing money. Now, it has a pretty solid operating margin.

Obviously, this is the flip side to that. To get that growth, you're going to have to spend a ton of money in capital expenditures, and they've done exactly that, $51 billion just in the most recent quarter.

We'll see in the conference call what the update is on that guidance for 2026, and if they say anything about 2027. They've kind of been vague saying that they're going to grow capex in 2027, but not really given a number on exactly what that means.

Cash flow. Here's the other thing also negative for the quarter. Negative $9 billion in free cash flow. So, we now have two quarters in a row for Alphabet. Negative free cash flow.

Operating activities still generating a ton of cash, $42.3 billion worth of cash, but that capex is eating up more than that. So, we're not at a sustainable point with that capex.

Now, I want to get to that onetime cost in just a second, but first of all, let's look at the balance sheet. $265 billion worth of cash on the balance sheet. So, if they're going to spend $200 billion in capex over the next year, probably a little bit more than that, they already have that cash on the balance sheet without accounting for any operating cash coming into the business.

So, sitting in a pretty strong position. Not a lot of companies have that kind of ability to spend cash, but a lot of these big tech companies have kind of been hoarding cash knowing that they're going to need it in the relatively near future.

On the flip side, they do have $125 billion worth of debt. So, they have been taking out debt. They have been selling shares to build that cash position. All of this, of course, is with the idea that AI is going to pay off for Alphabet eventually. 100% growth in the cloud business. You can't really argue with those results.

Okay, this is the big number that I think investors are currently confused by. We'll see what the reaction is after the conference call and exactly what they say about this, but this is the number right here, $ 8.7 billion loss related to equity securities.

Okay, so we have note number one down here. This includes all gains and losses unrealized and realized on equity securities for third quarter of 2026. The net effect of the loss on equity securities was $8.7 billion decrease the provision for income taxes, net income, and diluted net income per common share by $1.9 billion.

$6.7 billion and 55 per share respectively. So that's when I added that 55 per share earlier. So that's where that number came from because that's what they said that's that's how it impacted the diluted net income per share.

Now this was a loss this quarter but look at it a year ago we had a $10.7 billion gain. If you go up here to the income statement you can see that for the year $127 billion worth of gains.

So most of that is going to be the position that they have in SpaceX and Anthropic. Obviously, as these companies are now SpaceX is publicly traded, if that goes down in value, which it may have by the end of the quarter, that would actually be marked to market.

That is reported as a loss on their income statement. So, that $212 number, not really the one that you want to focus on.

What I think is really impressive with these results is one, the growth in the cloud business. Just crazy that that's growing 100% year-over-year. The other thing is that operating income continues to improve not only in the cloud business but also in the core business.

Remember those operating margins continue to go up. Search is still growing double digits. I think management is handling everything pretty effectively when it comes to the transition of this business to much more of an AI and cloud business.

Stocks not the cheapest. 22 times forward earnings is what we're looking at right now. Stocks down about 7% as I'm recording after hours. So the market's not really happy with these numbers.

We'll see what management says during the conference call exactly how that's taken by the market.

But I thought this was actually a reasonably good report because the core business continues to grow. Those margins continue to expand. We don't see a lot of disruption in that business.

And the new businesses, particularly the cloud business, is just growing like an absolute weed. That alone could be worth a trillion$2 trillion just that cloud business alone. They also got a ton of momentum with their Gemini models.

TPUs are being sold. So, a lot to come for Alphabet. I think a lot to like in the future.

This is not a stock that I think I'm going to be selling anytime soon after this after this earnings report.