$GOOGL · Joseph Carlson After Hours · 2026-10-29

Google has just announced its earnings results, and as a result, its stock price has fallen by 12% today . This means a loss of approximately $500 billion in market value for this company.

A huge amount of value lost. In fact, this is a drop of $39 in the share price, making it well below $300 per share . Up until now, Google has been one of the best-performing stocks in the market.

Their earnings reports were excellent quarter after quarter. So, what happened in yesterday's report that caused this huge sell-off? Well, we have renewed concerns . Do you remember when everyone was worried about ChatGPT destroying Google search?

Well, those same fears began to resurface. Alphabet's profit failure reflects the first real sign that artificial intelligence is eating away at a portion of research.

We also have Gene Monster appearing on television and saying that this is not good. Or they say that AI search queries have had an impact on search revenue. So, how can you not be good?

Yes, exactly. This is their primary job, and that narrative has returned that their primary job is being undermined by artificial intelligence. Google search is now being undermined by artificial intelligence. That's not a good thing.

Now, is this true? How much of this really comes down to artificial intelligence? Are research activities declining? We have seen a sharp quarterly slowdown, and that is what is really worrying investors today.

I want to review this and provide some clarity, because I feel that a lot of the things people say online, a lot of the posts, a lot of the Discord conversations, are not accurate.

It's not accurate. What I hope to do in this episode is to clarify the true situation of Google. What is really going on with this company? Not only with regard to the research and undermining situation, but also with regard to the stock's valuation.

Given Google's financial situation, where their profits are rising while their free cash flow is declining, and with their capital expenditures exploding, it becomes difficult to understand the whole situation.

I think it's important to review and clarify what's really going on with Google.

Now, to get started, I first want to take a look at some of the graphs about Google's position. For example, we will start by simply drawing the price chart. Google's stock fell by nearly $40 per share to $283.

Even after this decline, Google has still achieved a compound annual growth rate of 14% since 2021. This means it has significantly outperformed the QQQ and S&P 500 indices over the past five years.

This includes the recent drop that occurred today only. Historically, Google's stock price reached $399. Basically, its price reached $400. The lowest level it has reached in the past five years is $83, while the average is $156.

So, for now, Google is still a well-performing stock even with this decline. This decline diminishes the exceptional performance, but the five-year average of $156 shows that the stock has really risen over the past two years.

Now, we can look at how this price change affected my portfolio, because Google was one of my biggest financial centers, and it was severely affected. The impact of Google's decline on my portfolio was 1.5% .

When I look at my one-day performance, I find that I am actually down by only 0.6%. But that's because Google's stock has fallen so much while the stocks of many other companies have risen.

If we look at Google, we find that it has decreased by 12%. This is equivalent to $23,400.

Now let's take a look at Google's financial situation. We can start with the company's revenue. It is important to emphasize that this is the year-on-year revenue growth rate over the past twelve months .

Therefore, this is not their total revenue. It's not as if the performance will stabilize and then decline. This is the growth rate. Revenues are growing over the past twelve months by more than 20%.

This is extremely fast. Google remains a fast-growing company and will continue to grow even faster in the future, even as search slows down. This is due to the sheer size of the cloud business, which is growing at a rate exceeding 100% on an annual basis.

But when we look at it , we will see that it will reach revenue growth of about 25%. Those are the estimates. Then it will gradually decrease to 23%. What I see here is very encouraging.

This is one of the best revenue growth lines I 've seen for a large company. Therefore, I don't see any concerns here.

In fact, if you move on to look at overall revenue growth, this is what it looks like. This is the revenue for the past twelve months over time. You can see that it is growing at a compound annual growth rate of about 14.5%.

In the third quarter of 2028, Google's revenue is expected to reach $727 billion, according to analyst estimates . This is a continuous and enormous growth in revenue. This is also revenue growth and a really good product line .

Cloud computing is not an unprofitable activity . In fact, it enjoys high operating profit margins . This is why they invested in it so heavily. This is what it looks like for revenues to continue growing at a rapid pace over time.

In fact, it will accelerate from what it is today . We will reach approximately $730 billion in revenue in 2028, which is incredible. Google has already stated that it has reached an average annual revenue of half a trillion dollars.

These are astonishing numbers, and this is not the behavior of a financially unsound company .

Now, as we look at these metrics before getting into a debate about whether artificial intelligence is disrupting Google search, I want to take a look at earnings per share because that is the most confusing part of Google's financial data.

If you're only looking at earnings per share growth over time, or even price-to-earnings ratios, that doesn't really tell you what's going on, nor does it clearly show Google's valuation.

It is one of those cases where the numbers are technically accurate, but without the proper context, they are very misleading. This is what we see here. This graph shows the year-on-year growth rate of earnings per share over the past twelve months.

Therefore, each of these bars represents a quarter going back 12 months in earnings per share growth. Now, did Google's earnings per share really grow by 120%? No, that didn't happen.

They just invested in SpaceX . SpaceX has put its shares up for public subscription. Google generated approximately $100 billion, which was considered net income and is included in earnings per share.

Therefore, the vast majority of this huge jump in earnings per share is solely due to SpaceX's investment. However, the large sell-off of SpaceX shares also means that future earnings per share growth is misleading.

Google's stock earnings will not actually decrease over time. Instead, it will continue to grow at a rapid pace. But this growth is not shown here. So, if you're looking at a stock analysis site like Qualtrics or others, you usually shouldn't use Google's 12-month price-to-earnings ratio, because it includes the SpaceX investment and any other investments they sell.

Price-to-earnings ratios are typically not subject to Generally Accepted Accounting Principles (GAAP) , meaning analysts are already ruling out SpaceX . Therefore, the price-to-earnings ratio must be accurate.

When we look at comparing the price-to-earnings ratio, this is what it looks like. This valuation is based on the price-to-earnings ratio , with Google stock trading at $285, its current price.

Looking at it, the price-to-earnings ratio adjusted for 2025 is 30 times . So, that's for 2025. And if we look at the estimates for this year, 2026, it's trading at 24 times. If we value Google based on 2027 projections, and exclude SpaceX, it trades at around 18.6 times.

Looking at another year, namely the revised 2028 estimates, it trades at 15.5 times. So, the basic way to think about it is that right now , barring all exceptional events, Google is trading at around 19 times future earnings, and based on 2028 , it's trading at around 15 times.

Google is no longer an expensive company based on its profits .

If we visualize these one-off sales and how they affect earnings per share, it will give you a clearer picture. The company experienced a huge one-time jump in profits, and then it will start to decline again.

But over time, Google's stock profitability has grown steadily. In fact, Google's stock profitability is growing very rapidly. If we look at the adjusted growth rate, in 2026 it will grow by about 25%.

By 2027, that means 32%. Again, this does not include investment gains. This is the rate after excluding those gains. In 2028, it is expected to grow by about 20%. So, right now, and for the next two years, Google is actually a very fast-growing company in terms of earnings per share.

This is good news for Google shareholders, but most investors ignore it; it is not their main concern .

Many investors look at free cash flow. Free cash flow had been steadily declining. While Google invests in its massive infrastructure, it consumes all of its cash flow. We can see that in the last two quarters it turned negative, which reduced the free cash flow margin, which is the amount of cash flow transferred from revenues , from its usual range of 20 to 30%.

Historically, Google has been one of the most profitable companies in the world, literally. In fact, I think it was the most profitable. But now it is not profitable at all on a cash flow basis.

A negative free cash flow margin of 7% in the last quarter, and a free cash flow deficit of $9 billion . When we look at this on a basis of the past twelve months, we see the trend here.

It has continued for years to generate impressive free cash flow , with $60 to $70 billion of free cash flow over the past twelve months . The free cash flow margin was around 20 to 25%.

A very healthy business. Then we see it plummet sharply. In the past two quarters, free cash flow has collapsed significantly. It has dropped from a range of 20 to 25% to now stand at 4.2%.

Free cash flow over the past twelve months amounted to $19 billion . It may actually turn negative on a twelve-month basis, but we will have to wait and see what happens in the next two quarters.

So far, it doesn't look too bad for Google. Revenues are growing very rapidly. Earnings are stable, and even excluding one-off gains from SpaceX and the like, earnings per share are growing very rapidly and are expected to continue to do so over the next two years.

We also have a company that is investing heavily in capital expenditures to fund future cloud growth, and the cloud has not only been promising, but is already starting to pay off.

We are already seeing the returns of cloud growth. Therefore, in and of itself, I don't see anything here that justifies a 12% drop in the share price.

When we look at what's on investors' minds, we can delve into revenues by sector. This is where investors are really worried. In this green color gradient , we have one section that makes up about half of the total .

In fact, it's slightly less than half during the last quarter, and that's Google search. When I look at Google search, this is what it looks like . Good. What I see is that it has grown by 16% over the past twelve months.

Based on the past twelve months, it doesn't look too bad, but you'll notice it slowed down only in the last quarter. In fact, when we turn this into a quarterly basis, it paints a clearer picture here.

In the last quarter, Google Search grew by 12%. This is generally acceptable growth . The problem is that it grew by 16% in the last quarter. So it has slowed down from 16% to 12%, which is a fairly significant slowdown.

Investors and Wall Street had been expecting Google Search to grow much faster. So they failed to grow this "Google search" and of course that opens a Pandora's box of questions.

What if this is the reason? What if that was the reason? Is the reason "Muse"? Is the reason "Group Boot"? Is the reason "AI overviews "? What is causing the massive slowdown in Google search?

This is the moment the pessimists have been waiting for. Look, up until now, Google Search has not only been doing well, but has been constantly accelerating. His performance was getting better and better .

Revenue continued to grow faster than expected, so the pessimists were left there saying, "Ah, I don't know what to say . I mean, Google Search is doing phenomenal. Revenue is growing, searches are growing, and everything looks really good."

But they were waiting for their moment. This is the moment when Google search shows any signs of weakness, anything at all. The sign of weakness that will eventually appear is slowing down.

A slowdown is bound to happen at some point. So, we knew this moment was coming. We knew that Google Search would eventually show some signs of weakness, and it finally arrived with this week's report.

The slowdown from 16% to 12% is rather surprising . Therefore, this gave an entry point for pessimists to put forward their point of view and let their imagination run wild . As expected, we have people like Gene Munster appearing on CNBC to explain how this is a big problem for Google.

Listen to him as he makes this argument. But this suggests that something isn't working quite right. They made excuses, and you talked about them. Ah, what matters is what they said about the December quarter, and they said the growth rate would be slower.

During the call, the strong growth in AI-mode queries impacted search revenue. In addition to saying that exchange rate fluctuations had a greater impact on the third and fourth quarters, they say that AI search queries had an impact on search revenue.

So, how can you not be good? Yes, exactly. This is the core of their work. It seems that Gene has become pessimistic about Google as the stock has declined, which is not too surprising .

But some of what he says has merit. The reality today is that there are more ways to find information than just a Google search. It is quite obvious to anyone that you can go to Muse, ChatGPT, or Anthropic.

Now they not only function as general information sources or Wikipedia encyclopedias, but also as field research tools . You can search for almost anything. The fact that there are all these different ways to find information, and that all these users are using all these different platforms, has raised new concerns for Google.

So, here we are facing Google's first real big test, with the stock dropping 12% and investors experiencing renewed fear.

When Gene Munster appears and says, "Google has made excuses." This is belittling something I believe is important. He calls them excuses. When a company comes in and says, " Guys, this item in revenue has decreased, and we have specific explanations for why it has decreased."

For an analyst to come on television and just say, "Ah, those are just excuses." He didn't even mention it. He did not mention what those excuses were. He only said that they were excuses, and the real reason behind the decline was robots or agents.

But Jane, isn't it really worth looking into those excuses that management has given? Their explanations for why the stock has fallen so much, aren't they relevant ? Isn't it worth mentioning here?

Because I looked at what management had already said and it seemed very relevant and explanatory of why Google search slowed down at the rate it did. During the earnings call, management addressed this issue specifically.

They said the research grew by 12% year-on-year. Well, in the previous quarter the percentage was 16%. When you look at the change in growth rate from the second quarter to the third quarter, there were a few driving factors here.

First, there was FX, i.e., foreign exchange rates . It was the biggest factor in the slowdown of research compared to the second quarter. Therefore, from the beginning we know the biggest factor of slowdown.

The single biggest factor was foreign exchange rates . That is, it has absolutely no relation to the essence of the work. Google's search engine slowed down mainly due to fluctuations in exchange rates.

They then explained some other reasons that led to this sharp slowdown. This was the biggest driver of the slowdown in search compared to the second quarter . Then there were dynamics specific to certain sectors.

In the retail sector, some of our advertisers in the Asia-Pacific region were affected by the European Union's abolition of the minimal value exemption.

So, we have another exemption, which is something of an external nature. It has no relation to Google's core business or to the dynamics of competition. In the media and entertainment sector, spending has returned to normal after a very strong second quarter driven by the FIFA World Cup .

You are comparing this quarter to a quarter that witnessed the biggest global event in 4 years. They stated that advertising spending was unreasonably high because of the World Cup.

Again, this is not something fundamental to Google's business. These are not factors that should be presented as problems of a competitive nature. These are things that happen in the world and happen to affect their work.

They say that advertising budgets allocated in June were higher than in July. Also, regarding the next part of your question, it should be noted that the strong growth in AI-mode queries has had an impact due to the decline in monetization in this mode.

This is where investors started to get worried. They say that we are growing in artificial intelligence mode, and it is generating revenue at a lower rate than our traditional research.

Therefore, this is the essence of the discussion on the self-corrosion of businesses. But it provides more context here as well. We feel very optimistic about the path forward here.

Our advertising experiments have shown promising results, and we are now expanding advertising within both AI Looks and AI Modes to include more users and more queries, including international markets and multi- round ads in the United States.

So, these are management's excuses, things they didn't think were worth telling you on TV . The main reason for the slowdown in Google search was due to foreign currencies. Furthermore, we had comparisons with the World Cup, which is very difficult to compete with for any advertising activity.

Then they mentioned the last reason there, which is the one everyone will focus on, which is that artificial intelligence is eating up some of their work. This part is correct.

Here we actually arrive at some real weaknesses. What is happening now is that traditional research has been a highly efficient money-making machine . Blue links, searching through them, and looking at companies—all of that has already gone through a decade of improvement.

So, it is a very simplified product that has been greatly optimized for profitability.

Google realizes that it cannot be satisfied with just that. So, they are willing to risk their current business, moving everyone into AI-powered overviews and conversational context in search, and integrating advertising into that.

But the work they transfer people to is not as efficient or improved. Therefore, it does not generate quite the same amount of money as the previous job. Therefore, the more people who switch to it, the less they earn per click or any other way they measure their performance.

When I look at this, I don't think it's as big a problem as people think , because Google is still in the early stages of monetizing AI-powered contextual search . They will get much better at that over time, just as they did with traditional research.

There are many indicators they provide that suggest they believe AI research will be more profitable in the long run than before.

So if you look at this, you'll find that it's a transitional period. Certainly, there is a deliberate erosion that will move people from a historical product to a new one, but the roadmap is very clear .

There are already profit-making operations taking place right now . They are rolling it out to more users.

And so I see some things working against Google today. This is reflected in the slowdown, and the ongoing narrative about artificial intelligence consuming search engines. We will not easily get past this narrative.

It will remain there until the search starts accelerating again. So we may face a few quarters, perhaps a year, of ongoing pain in Google's stock.

This comes in conjunction with a few other factors that exacerbate the situation. The reason for the stock's significant decline this quarter is that Google not only failed its operational metrics, but its free cash flow turned negative, and they acknowledged a degree of erosion.

When you have this kind of story with a group of investors who are already extremely scared, it causes massive sell-offs.

Therefore, there are negative arguments that can be made. Some investors are genuinely concerned that Google's search will continue to slow down and eventually erode and begin to turn into a struggling business.

But I don't see that happening, and I don't see any evidence of it yet. What I see is a slight slowdown for very good reasons, and their work to profit from a new way of gathering information, which is something everyone will do.

Whether it's ChatGPT or Muse, they will all profit from new ways of obtaining information.

When we look at this, it also obscures some of the good things that are happening at Google. For example, I don't see enough interest in the fact that Google Cloud has grown by 100% year-over-year, in fact 103%.

Crazy growth. Google Cloud generated $30 billion in the last quarter alone, and profit margins remain stable. Therefore, we are not in a position to sacrifice profit margins for the sake of growth.

Cloud profit margins reached 36%. Excellent margins for a business that is growing extremely fast.

Some investors were concerned that the cloud business backlog , while continuing to grow, had seen a slowdown in its growth rate quarter after quarter. That's right, it only increased from 513 billion to 560 billion.

But here I think investors are also misunderstanding the matter. You don't want the backlog of work to grow forever, because the backlog is a promised revenue. What you really want is revenue growth.

And it wants them to consume their accumulated work at an increasing rate, which is exactly what Google does. The reason this buildup is n't faster is that Google Cloud is growing at a rate of 100% year-over-year.

It consumes the backlog of work. You want a healthy build-up of business, but you also want them to grow their revenue and consume that build-up faster. That's exactly what Google does.

So, I don't see this as a problem at all. I want the backlog of work to remain around this scale. I don't want it to grow to a trillion dollars. I would prefer Google Cloud to continue growing rapidly.

When we combine YouTube and subscriptions, we find that a large portion of subscriptions come from YouTube. There are other things included as well, but a huge part of it is YouTube Premium.

This is growing at approximately 10% annually. So, this is another part that wasn't very impressive on Google's part. YouTube also slowed down. Now, is this a problem? not really.

We have YouTube dominating television. Everyone has seen the metrics that indicate the engagement is insane on YouTube. People watch YouTube on TV much more than they watch Netflix.

So, YouTube has essentially won over television so far. They also win in subscriptions. This is a huge crown jewel of works. I truly believe that YouTube is one of the best businesses in the world.

Then Google has the Gemini models, which Sundar has been pushing for a long time , and finally we have Argon, their new models, which are very impressive. We have Waymo, which is doing exceptionally well.

We now have Google, and it's moving towards selling its own chips. This is a great job they can get into. Therefore, there are many ways for them to continue growing.

In fact, one of the things I noticed in this earnings call was that, for the first time, they hosted the cloud manager on the call . Google wants to shift from being known primarily as a search engine company to being known as a search and information company in addition to the cloud .

They make the cloud a bigger part of the story, and of the overall narrative. This is where they believe the future lies. Over time, the cloud will surpass Google's search engine revenue . It will be the main driver of future growth .

Therefore, my expectation is that we will continue to have this discussion over the next two quarters. Does artificial intelligence erode the role of research? What do the search numbers look like?

Is there still a slowdown ? This will put pressure on Google's stock. Therefore, I don't necessarily think you need to rush in and buy Google stock today. At least I don't see a major recovery or a strong rebound anytime soon. I think that will take time.

But Google is still a stock I will continue to own . I don't plan to sell any part of it. I already have a huge financial center there. And I will continue to hold on to it because I believe that Google is still one of the best companies in the world, and it is currently trading at a relatively low valuation based on any short-term metrics.

In the long run, I see them winning in the cloud space. And I see YouTube continuing to grow. I see Waymo gaining a larger market share. The Gemini is still competing as a leading model.

I see a lot of good things about this company, and I also see that research will turn into AI-driven monetization over time. I think Google is still one of the best options on the market.