$GOOGL · The Motley Fool · 2026-10-29

Alphabet almost sets a record no one really wants. We have both Microsoft and Google reporting this morning and it was a bit of a doozy. As we said, the the record no one wants is as of right now, Alphabets has lost about $500 billion in market cap. Shares are down about 12% as we're recording.

So, the market doesn't seem to like what Google is saying or uh the apparent of Google, Alphabet. What is the big narrative here that everyone seems to be piling onto Google? And do you buy that narrative?

Well, I mean, the first thing is Alphabet or Google, I'm I might still call them Google, didn't have a bad quarter. It it had an expensive quarter. And that's really the narrative here.

I mean, revenue growth looked great for a company of this size. Revenue grew 25%. Operating income was up 30%. Those are huge numbers for such a large and honestly quite a mature business.

Uh the real problem is cash. Um for for this quarter, uh their capex was over $51 billion. That's more than double a year ago and free cash flow is negative $9 billion compared to almost 25 billion in positive free cash flow the same quarter last year.

And not only that, they're expecting capex to rise from about 200 billion this year to 300 billion next year. Now, I've said before that at some point the numbers are going to get too big to convince investors that this spending is going to be worth it. And I think we might be at that point.

I mean, Google Cloud's revenue growth, their growth rate has accelerated for six consecutive quarters and is now over 100%. But if the company's not making money on the bottom line or or generating positive free cash flow, the market's not convinced it's going to be worth it.

Yeah, John, you and I, we were actually talking about this before the show a little bit because, you know, got to spend money to make money and and with hyperscalers, all of these data centers, there's going to be a drag here like you have to spend all this money for these data centers before they come online.

so we're seeing this, you know, maybe this decline in returns, this big outflow of capital, but the argument you were making is like, well, yeah, but once those things start to come online, we should start to see the return start to bounce back.

Do you still believe that after you're seeing this most recent earnings?

There's naturally going to be a lag in between the investment and the return on the investment. That can't happen instantaneously in cases like this where you're spending so much money into a data center.

That data center is not going to start to generate a return for you until sometime later. You're going to be spending money. Think about just pouring concrete before you're actually generating some compute and revenue from that. So naturally, there's going to be a lag.

Look over the last three years here. As Matt pointed out, this isn't this is incredible revenue growth for a company of this scale. Over the last 3 years, trailing 12-month revenue up 53%.

But if you look at the cash from operations, that's up 76% over the same time. So, the business is generating more cash per revenue than it was three years ago, right?

Google has its own compute hardware called TPUs, tensor processing units. This is in competition somewhat to Nvidia's GPUs. Right now, there's an inventory buildup there because they're preparing to service commitments that customers have already made to spend.

before we get uh move off of Google, guys, we saw some revenue declines at the ad revenue uh because more people are using AI. Is this do you think a burn the ship sort of moment where it's like focus way way more on AI or you know, should we maybe just continue to think of ad revenue? It's going to be there for a while.

No, this isn't a pivot away from advertising in my view. I specifically because you do have YouTube still. This is a mega mega advertising revenue generator. And as the company's pointing out, this is still kind of the king, if you will, of the living room because that's what my family is watching on our smart TV.

We tend to not stream so much content, but we do do a lot of YouTube and that's a major major ad revenue driver. And when it comes to search, maybe it is starting to decline, but to me, that's little focus and a lot of money still to be made.

I'd also say no. I mean, a lot of other companies we've seen report um you know, have done a great job of making ad ads better with AI and uh I I think that's still Google's long-term goal.

Uh Google Cloud, I mentioned their growth rate, it actually grew a whole lot faster than Azure, 103% versus 48%.

The remaining performance obligations for both companies is incredibly massive. We can't even comprehend the numbers that they're putting out. So, there is potentially, yes, a lot of spending still to happen with these companies because of how much demand from their customers, future demand, and that's what RPO is measuring.

Microsoft's remaining performance obligations 683 billion massive but actually down 1 billion sequentially compare that to Google or excuse me Alphabet 568 billion in remaining performance obligations that is up 48 billion just from last quarter so massive massive ongoing report uh performance obligation growth for Alphabet compared to Microsoft especially