$GOOGL · Mark Roussin, CPA · 2026-10-29

Alphabet, or Google as some still call it , has just announced its latest earnings, and its stock is experiencing a very sharp decline . And I will be honest with you. Alphabet is my largest individual stock holding, so this definitely hurts.

But what worries me more than just the stock price movement is what I saw when I started looking into the latest report. There were some really impressive numbers, but there were also several things that worried me as a shareholder.

Total revenue did not meet analysts' expectations. Google's search engine did not live up to analysts' expectations. YouTube's advertisements also failed to meet analysts' expectations.

Google Cloud was the only bright spot, not only exceeding analysts' expectations, but also doubling its value compared to the same period last year, and not only was it growing , but it was becoming more profitable, which is what I like to see.

The company's overall operating income came in much lower than expected. Adjusted earnings per share were significantly lower than expected by more than 10%, and then the final blow: negative free cash flow of $9.1 billion, while analysts had expected negative free cash flow of less than $3 billion.

However, they were in a negative position from a free cash flow perspective. But again, it was not surprising that the results were negative due to the company's large spending.

Companies go through these cycles for a few years to maintain growth for years or decades to come, I should say. So, for me , negative free cash flow for two consecutive quarters is not surprising at all .

In fact, you should expect this for at least the next two or four quarters .

But the number -9.1 billion was a large number. Much bigger than I expected, and obviously much bigger than the analysts predicted as well.

Looking at this picture, you can see that the company's free cash flow over the past twelve months is still positive, but it has fallen to its lowest level in more than a decade.

This figure is definitely trending downwards and is likely to become negative within a 12-month period. Therefore, this in itself is a major reason for the decline in the stock and a source of concern for us as shareholders.

Alphabet spent $51.4 billion on capital expenditures during the quarter alone. The administration still expects capital expenditures for the whole of 2026 to range between 195 billion and 205 billion.

There were no updates to those specific guidelines, so they left them as they were.

Management anticipates an increase in capital expenditures. If they had stopped at this point, it would have been acceptable. But they said it would increase significantly in the next fiscal year .

So, we are not talking about a company preparing to cut spending or keep things as they are. We are talking about a company that is preparing to spend more money. And that's when my anxiety starts to increase.

Because I understand why Alphabet needs investment. Artificial intelligence requires enormous amounts of computing power, data centers, things like networks, more sophisticated chips, and huge amounts of electricity.

But as a shareholder, I ultimately need to see those investments translate into some kind of return, attractive returns.

While the cloud sector is achieving that growth today, I am less comfortable with what we are seeing in some of the company's other businesses.

This raises an important question. Is Alphabet spending more and more money simply to defend a business it already owns, or is it spending it in the hope of growth? Will these investments ultimately generate new revenues and profits to justify the enormous costs?

I'm not going to tell you that I'm selling my Alphabet shares because I'm not doing that, but I'm also not in a hurry to buy this dip, and you know how much I love to seize buying opportunities when the market is down.

But I would be lying if I told you that these results did not worry me.

The biggest bright spot was undoubtedly the "Google Cloud" sector. Cloud revenues rose by an astonishing 103% year-over-year, reaching approximately $30.7 billion . This is more than double the revenue achieved in the same quarter last year.

Here's what makes this particularly impressive. Google Cloud is no longer a small company. We are talking about more than $30 billion in quarterly revenue. It still makes up a slightly smaller part of the overall pie, but it is a growing part.

Revenue growth is great, but it means nothing if profitability isn't there. Well , for Google Cloud, profitability was definitely there.

Google Cloud generated approximately $11.1 billion in operating income. This is up from about $3.6 billion a year ago. We are talking about an increase in operating income of more than 200%, and an expansion of the operating margin from 23.7% to 36.2%.

Think about this for a moment. For every $100 of cloud revenue, Alphabet now generates approximately $36 in operating income for that sector at the end of the year. This is exceptional profitability for a business that is growing at this rate.

This is important because Google Cloud has become a more significant contributor to Alphabet's overall profits. The company is capitalizing on the demand for AI infrastructure, enterprise AI solutions, and its proprietary Tensor Processing Unit ( TPU) technology.

The administration announced a backlog of cloud applications worth approximately $561 billion. It is true that accumulation is not the same as revenue or profit , but it gives you a clear view of future demand.

This is one of the reasons why I am not giving up Alphabet shares. Google Cloud is becoming an increasingly valuable business , and I believe there is a real opportunity for it to continue growing over the next few years.

Research and other revenue totaled approximately $63.4 billion . This represents a 12% year-on-year growth. Well, a 12% growth rate is certainly no small feat , but analysts predicted revenues of around $64.9 billion .

So, the research recorded a deficit of about one and a half billion dollars.

But here's what worries me. In the previous quarter, search revenue grew by 17 %. We are now talking about 12%. This is a noticeable slowdown. And remember that research remains a very important part of Alphabet's business.

It is the largest component. It generates huge revenues and supports the company's overall profitability. So, when I see growth slowing down while Alphabet is spending huge sums on artificial intelligence, I pay attention.

The administration also stated that search queries grew at their fastest rate in 5 years. This is certainly encouraging, but it raises an interesting question. If search activity is growing at this rate, why isn't advertising revenue growing at an even faster pace?

I think that monetizing artificial intelligence is becoming an increasingly important part of this discussion, and we will return to that shortly.

But then, I want to move to YouTube, because YouTube's advertising revenue increased by about 9% to reach $11.2 billion . Again, this is growth, but it came in below analysts' expectations of around $11.4 billion.

It is a smaller deficit in this case, but it is still a deficit. But it's about slowing down . It was a slowdown from the revenue growth of approximately 13% that we saw in the previous quarter.

We looked at the research, and we saw a slowdown. Now we look at YouTube's advertising revenue, and we see a slowdown once again. These two sectors are very important to the business, as together they account for about 60% of the company’s total revenue.

Therefore, seeing a slowdown in both of them worries me as an investor. I am not suggesting that YouTube has suddenly become a bad business. That's definitely not the case. But when both search and YouTube fail to meet expectations, I think it's fair to ask whether we're seeing broader pressure on Alphabet's advertising operations.

But this now leads me to what I believe is one of the biggest long- term risks facing Alphabet. It's artificial intelligence. I know this may seem a bit strange , because Alphabet is one of the world's leading artificial intelligence companies , isn't it?

It owns Gemini, it owns DeepMind, it has its own TPU technology that is expanding, and it has access to a huge amount of data.

But here's the challenge. Artificial intelligence can create tremendous opportunities for Alphabet while simultaneously threatening the economics of its most important business.

Think about how people have historically used Google. If you have a question, you type it into the search box . Google provides the results, and advertisers pay money to appear alongside those results.

This model was exceptionally profitable . But now, imagine a different experience. Instead of searching on Google, clicking on multiple websites, and comparing information yourself, you simply ask an AI assistant to complete the task for you.

Perhaps you are planning a vacation, or perhaps you are looking for a particular product, or comparing insurance policies , or perhaps you are looking for a restaurant . An increasingly capable AI assistant could take over much of that process without the need to interact with a traditional search results page.

Alphabet has its own AI products and huge distribution advantages . But the competitive threat is real, so I wanted to address it.

Speaking of which, if you review the earnings call and report, management alluded to this themselves. They spoke of the likes of "Muse," without naming him specifically, but again, at that same point, if they were referring to his influence on the research results, they thought about it .

"Muse" was available for less than one month of the last quarter that was just reported. Imagine that effect over the course of a whole quarter , or imagine it over the course of a whole year. The effect may be real.

Because if consumers increasingly rely on personal AI assistants, the traditional search experience may become less central to how they discover information and make purchases.

This raises a big question. Can Google generate profits from AI-powered interactions as effectively as traditional search? Because even if search queries increase , this does not necessarily mean automatically that revenue per interaction will increase.

If the responses generated by artificial intelligence become more expensive to produce , labor economics may become more difficult.

Now, it is clear that Google is effectively integrating artificial intelligence into search, and management has discussed progress in generating revenue from AI summaries and AI positioning .

So, I don't want to suggest that Alphabet is standing idly by , because it simply isn't . But as an investor, I want to see evidence that these AI experiments can generate attractive revenue and profits.

We want to see returns, not just more users, queries, or interaction. I want to see profits made; Because ultimately, that is what will determine whether these massive investments create value for shareholders.

Are we spending for the sake of growth? Or do we spend in an attempt to protect ourselves? Two completely different questions.

But here's the distinction I'm focusing on. Alphabet is spending heavily on artificial intelligence while growth in search ads and YouTube has slowed. At the same time , Meta is also spending heavily , but its advertising revenue growth remains strong, raising questions about which company is currently achieving the most attractive returns from its investments in artificial intelligence. Who gets a better return on investment ?

Well, it's not a perfect comparison. Meta and Google run different advertising activities. They have different capital requirements, and their AI strategies are not identical. But I think the comparison is worthwhile , because when companies spend tens or hundreds of billions of dollars, investors need to evaluate what they get in return.

Right now , I want to see stronger evidence that Alphabet's investments can accelerate growth in its core advertising business.

So, this leads us to the big question. Should I sell my Alphabet shares? The answer at the moment is no. But I'm also not rushing to buy additional shares at the moment . To begin with, I already have a large financial position , but I also want more information.

Alphabet will certainly go through a "proving-it-all " phase with me, that is, over the next quarter or so. But I would be lying if I said I wasn't concerned about what we see in this report.

The slowdown in growth in search and YouTube worries me. Negative free cash flow, that worries me too. The projected increase in capital spending in 2027 also worries me. Because at some point, I need to see some kind of return on those investments. The slowdown in growth is not a return.

Now, the good news is that the cloud sector has performed exceptionally well. Alphabet's core operating income continues to grow. Therefore, I do not look at these results and conclude that the investment hypothesis has completely collapsed.

But I think the risk profile has changed completely.

So, here's what I'm watching . First, I want to see stability in search revenue growth. Secondly, I want to see Alphabet demonstrate stronger revenue generation from AI- powered search experiences .

Third, I want to see the cloud continue to grow without sacrificing the incredible profitability improvements we've just seen. Finally , I want to see a clearer path toward improving free cash flow and returning it to positive territory.

Because if capital spending continues to increase while cash generation deteriorates , it may ultimately change how I value this company.

My position today is perfectly clear and straightforward. I hold Alphabet shares. But I'm not adding anything more. My conviction has been put to the test. There are still some amazing things happening within the company.

Google Cloud is operating exceptionally well, and Alphabet has the technological resources and distribution to remain a major player in the field of artificial intelligence.

But I think the next few quarters will be very important for them, because investors need to see if these massive investments in artificial intelligence are able to generate sustainable growth and attractive returns.