$GOOGL · The Motley Fool · 2026-10-28

Google stock just reported earnings and unfortunately the stock is down nearly 10% after hours. Neil and I are going to take a closer look at some of the things that Google said during the earnings call and why maybe the market is pricing a bit of fear on the stock.

Some of the misses are because of their investments in SpaceX. So, previously we've had positive, let's call them pumps of earnings per share. This time we we got we got a miss.

A large part of the miss was because of the investment in SpaceX, but it's not the whole story.

So, revenue did miss by.5%. So remember if it's down 10% after hours this means this company has lost over $300 billion in value because of a.5% miss in revenue 2.2% 2% miss in Google services, 2.5% miss in search, YouTube ads was also missed by 1.7%.

Surprisingly enough, the the one business that has been in a decline for the last couple of quarters, Google Network, that was actually a beat of 3.5% and actually increased as well.

Cloud was also a very big positive here, beat by 5.3%. We're definitely going to talk about cloud subscription platform and devices was also a missed by 3.8%. Cloud operating income a beat by 14.1%.

Free cash was negative. Should not surprise us either. Although the number does look much bigger than it actually is. The actual number is $9.1 billion, but if you remove a one-time European Commission fine, you get much closer to three $3.2 billion, which is closer to the that's negative, by the way, which is closer to the $2.7 billion negative that was expected.

Now the story to for for me especially going into this report is how fast is cloud growing? How profitable is this going to be? And well maybe surprising enough for most but this is the first quarter where search as a percent of the whole revenue that the business generates dropped under 50% and is actually smaller than the rest of the business.

I think one is at 49.7% and so the rest of the business is is the rest or a bit actually it's a bit higher than that but for the first time ever search as a percent of over revenue is now lower than 50%.

Previously the whole risk was of course oh what what happens with search that that's a huge business for them very profitable still is still is a huge business still profitable but since cloud is growing so much faster becoming a bigger chunk of the overall business we are now seeing a in my opinion a way more balanced business today

definitely ne a few points I wanted to kind of bring up there uh that you kind of discussed really quickly was right free cash looked extremely painful but you mentioned right it definitely because of that onetime fee hit.

Um we also saw um cloud cloud was growing at massive massive levels and of about um over 100%. Now the surge I think might be one of the things that investors might be scared about.

Uh I'm going I'm not going to lie. I'm a long-term investor right Neo of Google. So I'm trying to pull teeth of what the market might be might be hating on right now.

And if I had to pick one thing I do believe it's the search, right? search we we saw that um did miss on expectations and they gave two strong reasons for it. One of the first or actually three um the the first kind of reason was uh just currency exchange rate they they mentioned that was the the largest driver versus a quarter ago.

Uh the other one was same last year we had uh last quarter we had kind of like the world cup and all that happening. So that was very uh very big for um surge. Everybody was wondering who was this player, who was this player, how many players, how many scores did this.

So, uh, surge, yes, was hit was pretty exciting uh last quarter.

Um, one of the other things that I thought was a uh kind of a scary thing if investors had to pick uh was they mentioned that their AI mode was growing in it was growing a lot faster than maybe the market expected and unfortunately that car that carries lower monetization.

So it one of the reasons I think the market is is is fearful right now Neil is they're going back to this thought process that we had maybe two years ago of is AI going to kill your search business?

Now if you look at the top level numbers without looking at anything else the story seems like it's yes right you mentioned right now search is under 50% of the business right where back then it used to be the majority but then like you mentioned the real reason for things like that is other parts of its business are growing at rapid levels um so so if there was one thing I believed was was kind of creating a lag in the stock it it was definitely this uh Neil

you know I agree I think you mix this you mix the fact that again free cash flow is is negative capex actually expectations came in lower than what the market was expecting but there's still expected to see a lot of growth in capex I think next year they said again sa sign significant growth significantly higher so this is a company right now that by the way the overall business has still growing 24% or so which is now seven consecutive quarters of accelerated revenue growth code.

So, it's definitely not a not a bad business, but I get it. Certain misses with search year comparisons even for next quarter is also going to be tough. Fine. FX headwinds still still remain.

Then you go to the Google Cloud part. Google Cloud more than doubled year-over-year. Operating margin has expanded as well, 36.2%. So all of that is great but they did tell us again because this is something that they mentioned last quarter which regards to cloud is because they will start using or have started to use third party cloud players margins are going to be under pressure for cloud and so if you mix all of that together you can maybe see okay maybe that's why uh the market is pulling is pulling this name down

but then I go back to the to the backlog. So the cloud backlog is $561 billion. $310 billion of it is expected to convert in 24 months, which means that's approximately $155 billion a year versus the current run rate of $123 billion without adding any new business, which which is it's incredible.

And next year we are going to see I mean Q4 already but next year the TPU business is expected to ramp up aggressively.

So I understand why the market might be a little bit disappointed but this is it's not like a Google was trading at 30 40 times forward earnings and everything was priced in was still trading at the mid20s forward earnings.

I don't think that the EPS miss should be should be looked at that much purely because the large majority of it comes from the SpaceX investment and the market is again ignoring the cloud business, the TPU business, the growth there, the growth still in search. So it's it's a weird one.

Yeah. And and Neil, you know, I think this is another place where like the market is questioning a little bit um of what's happening. We saw based on estimates and I don't remember the real numbers here but we did see I think Google cloud beat estimates by about $2 billion or give or take a few few hundred million there um but this includes TPU sales right that includes TPU sales so the market is now and and Google didn't want that this and they mentioned TPUs are now a good portion of that Google cloud um tailwind.

So the market is I I want you questioning what happens if that wasn't there, right? What happened if TPUs weren't there? Would you have still have beaten in Google Cloud?

And one of the reasons I thought originally was Capix, right? We saw based on estimates, Alphabet actually spent less than what the market was expecting. But I think the market is also reading it wrong because now as they are entering into TPU business, they mentioned that any form of TPU investment doesn't go into the capex especially for those chips that are being sold to other third parties directly.

Um that actually goes into another portion of it. So it they even mentioned during the call it's a different type of capex. I am wondering if we would have kind of put that different type of capex and put it to the capex itself like would we have matched what the market was expecting.

Right? So is this fear of certain semiconductor stocks failing because of the fear that lower capex means lower expectations for certain semiconductor stocks. I feel like that might be um another exaggeration that the market is just trying to guess um even though it's just a difference in numbers.

I'm still even with the price reaction um and the kind of market trying to punish the stock. I was still very excited about earnings, right? I I like you Neil mentioned, I was also very focused on Google Cloud.

I I'm pretty sure we talked a little bit about it earlier, but right their backlog north of $500 billion. I I I have the number um here. Um what was it? It was 561 billion and and they mentioned 55% to be recognized in 24 months.

It's telling you that this buildout in cloud is making is making a real business, right?

So very similar to you, Google cloud was what I'm focusing on. I also see overall even though there were a bit misses in the other mark in the other trends there were still strong indication tokens continue to grow um search continues to grow even though the ad AI overview um is still taking a bit of a hit.

Uh so regardless of whatever we saw in the stock price there's no reason for me uh to kind of fear the stock right now.

I like Google. I think if we can I mean if the stock does stay under pressure under $300 per share I I wouldn't mind buying more but then again if Google gets under pressure then that probably means that maybe we'll see a Broadcom under pressure even though that doesn't make much sense because if if TPUs are such a success benefits from that directly I think then maybe Meta stays more under pressure.

So it really depends who's who's getting cheaper than than the others because Google is already quite a big position for me. But it's it's getting very attractive and I think the market is again not understanding or not looking at at the full picture here yet again for for Google