$GOOGL · Parkev Tatevosian, CFA · 2026-10-31

Alphabet announced its quarterly financial results after the markets closed yesterday, and the stock price fell by 13% the day after the announcement. when I assessed the results, I explained to channel members that most of what we saw from Alphabet this quarter were good numbers.

There were some concerns, but overall, the report was very strong in terms of revenue growth, profits, cash flow, etc., but it came in below expectations.

Wall Street analysts and investors had been expecting more from Alphabet, and compared to Microsoft and MetaPlatforms, there were key indicators of weak performance.

I have owned Alphabet shares since 2020, and I have rated the stock as a buy opportunity since 2020 and before.

Overall, Alphabet reported revenues of $128 billion, an increase of 25% compared to the same quarter last year. Google services, something I've been watching closely with Alphabet for many years.

This is the sector most vulnerable to threat from artificial intelligence.

Google said in its earnings statement for this quarter that the number of search queries reached a record high, and that growth was also at a record high. However, due to AI summaries, Google is no longer generating profits as effectively as it once did .

Total revenues increased by 11% to reach 96.3 billion. It is certainly losing market share. More and more search queries are moving towards large language models . But the overall size of the market is also increasing, as people have become more confident in their ability to find answers to their questions through online search, whether through a large language model or directly through the Google search engine.

Revenues in Google Cloud, where artificial intelligence revenues are concentrated, jumped by a growth rate of over 103% to reach $30.7 billion . Sales of "TPU" systems, which are Alphabet-owned chips, along with graphics processing units and central processing units, contributed significantly to revenue growth.

Their chips have become so efficient that they not only use them internally, but they can also sell them to customers looking for an alternative to Nvidia.

Total operating income increased by 30% and the operating profit margin reached 31.8%. Aren't these strong numbers? If your business revenue grew by 25% compared to the same period last year and your profits increased by 30%, you would consider that a good quarter.

But when viewed from the perspective of investors who anticipate these things and seek better outcomes, it sometimes leads to a decrease in the share price; Because investors had already raised the stock price based on their expectations.

They also noted that their model APIs now process 32 billion tokens per minute, more than four times what they were processing a year ago. So, the use of the company's artificial intelligence is on the rise , isn't it?

Revenues rose by three figures, and usage increased fourfold compared to the same period last year. These are the things you want to see when a company significantly increases its investments.

In fact, their "Gemini" application comes in third place in my opinion among the great language models . I would put Anthropic's "Cloud " model in first place right now. OpenAI's ChatGBT model is in second place, and Google's Gemini is in third, while others come in fourth, fifth, sixth and seventh places far behind.

We can argue about who is fourth, fifth, and so on, but in my opinion, they are all at least two steps behind the top three: Cloud, ChatGBT, and Google Gemini. It has reached over one billion users.

So, one of the worrying things, especially when compared to Meta, is the number of Alphabet employees, which rose from 190,000 in the same quarter last year, ending September 30, to 204,757 employees, an increase of approximately 14,600 employees.

So, this is a significant increase in the number of employees, with an annual growth rate of approximately 7%.

For me, this is the area where I see a justification for increasing investments in artificial intelligence, because revenue per employee is increasing. This, to me, is evidence of increased productivity within your company, and within your own business.

I saw that very clearly with Meta Platforms, didn't I ? Growth of 26% with 12% fewer employees. I don't see that clearly with Alphabet, whose staffing increased by 7% year-on-year, and which is reporting similar growth for Meta Platforms.

Another area that worries investors is the reduction of shareholder stakes. These companies, including Alphabet, are selling billions of dollars' worth of shares, and in the last quarter, they sold more than $12 billion worth of shares to fund their investments in artificial intelligence.

They also borrowed $29 billion in the last quarter that recently ended. Overall, they have raised more than $40 billion to fund their investments in artificial intelligence.

It is important to remember that they do not need this money immediately. They still have a strong balance sheet, as I will explain later. However, when you think you will need money in the future, it is always better to borrow it before you need it, because at that moment you can get more attractive interest rates, and you can sell your shares at higher prices.

When you wait until you desperately need the money , you will be charged higher interest rates, and your stock price is likely to be lower. Therefore, financing those investments will be more expensive if you wait until the moment you need capital to make those investments.

Based on the balance sheet , I believe they plan to significantly increase their investments in artificial intelligence over the next few years, which is, incidentally, good news for Nvidia's stock and Broadcom's stock, with which Alphabet is collaborating to create its own data processing units (TPUs) .

Balance sheets are now becoming increasingly important for these large technology companies , whereas for many years they were a secondary matter. Their balance sheets were in excellent condition, and we as individual investors did not need to worry about them.

But now, their balance sheets have become more important because they are borrowing a lot of money. But you can see here that its total cash, cash equivalents and marketable securities more than doubled from December 31, 2025 to September 30.

They now have over $265 billion in cash and marketable securities on their balance sheet. So, this is in anticipation of their need for money, isn't it? They didn't need it yet.

They already had $127 billion in the bank. They went out and more than doubled that amount .

Now, an interesting point here : $265 billion, even if put into ultra-safe short-term government bonds, would yield returns exceeding 4%. So, this sum of $265 billion could generate, let's see, four, eight, approximately 10, more than $10 billion in interest income. $10 billion in interest income, so their profits will increase as a result of gradually doubling this cash and short-term investments, which they put into these ultra- safe short-term government bonds and money market accounts, etc., which currently yield about 4%.

They also increased their property and equipment. Many of these investments go towards components in data centers. $373 billion. Overall, the company's total assets increased from $595 billion to $1 trillion .

This is huge in terms of scope, size, and the speed at which they have accelerated their balance sheet and assets.

So, this raises the question: how good are they at allocating capital? Isn't that so? What are their returns on invested capital? As for Alphabet, they have been relatively effective and are improving.

Thus, when I see this type of performance from a company's management team, and they find room to make more investment, I usually feel excited about the potential because they have found something they see as a great opportunity.

In fact, since 2022, their returns on invested capital have been above 20% and trending upwards, reaching 38.5 % in the most recent 12- month period. To put it in perspective, this is roughly equivalent to three to four times the company's average weighted average cost of capital.

So, they have to pay a price to get this capital, right? Interest expense or cost of equity. They were returning to investors a rate of return three to four times their cost of capital.

Now, this is what they have done historically, and this is what they have done over the past few years. The big question mark is, can they continue to achieve that? Will that get better?

Or will some of these AI investments be wasted and not generate those returns on invested capital?

My bet is that I put my money where I put my words because I own Alphabet shares and I keep my investment. I believe they will achieve a return on invested capital that exceeds their weighted average cost of capital for the next few years, and that these AI investments will pay off at least at their own cost of equity.

Accordingly, I am relatively confident of this, not only because of their history , but because of what I see in the industry: a supply and demand situation where there is greater demand than supply , with customer orders accumulating in the hundreds of billions of dollars that are already consistent with the lifecycle of these investments they are making.

They already have a customer waiting in line to buy almost everything they build. So it's not as if they're building it in the hope that there will be work. No, they already have the work, they have the demand, and they have the customer.

They are building it to serve that customer who is waiting to consume it. This gives me confidence that these investments will be effective.

This is another concern among those highlighted in the introduction. The company's cash flow from operations actually decreased on a year-on-year basis. Much of this now comes down to the timing of working capital calculations.

As you can see, there are other assets, outstanding expenses, and other liabilities, and changes in the timing of those payments and receipts can have significant repercussions .

However, their competitors have made increases in this metric, and this metric is becoming increasingly important because you are spending a lot on artificial intelligence. You want to achieve growth in cash flow from operations to reduce the difference between what you earn and what you spend so that you do not need to resort to investors to ask for a lot of capital.

Therefore, their cash flow from operations decreased from 48.4 to 42.3 billion. This was worrying to me and I highlighted it during the live earnings event I held with channel members.

Moreover, it is particularly worrying because their spending more than doubled from 24 billion to 51 billion, leaving a larger deficit. To continue with this point , you can look at the free cash flow figure, which, if you don't know how to calculate it, is calculated by taking the cash flow from operations and subtracting purchases of property and equipment, and so on to arrive at the free cash flow.

Alphabet is kindly doing this calculation for investors, and you can see the trend is getting worse, and this rate of deterioration is worrying. You can see 24.5 billion in free cash flow in the fourth quarter of 2025, which dropped to 10 billion in the first quarter of 2026, turned negative in the second quarter of 2026 to -5.9 billion, and got worse in the third quarter of 2026 to -9 billion.

So, that was the other warning sign or concern that she highlighted during that live earnings call.

So, after this drop, Alphabet stock is now trading at a forward P/E ratio of 18.5, which I think is relatively cheap considering everything that is happening with the company right now.

Revenue growth, all investments in artificial intelligence, all associated risks, etc. Putting all of that together at a forward price-to-earnings ratio of 18.5, I think it's relatively cheap .

I think it involves a lot of risk in the valuation, and I believe that investors at this stage, and with this valuation, get a good return for the risks they take, a good potential return for the risks they take.

I have also updated my discounted cash flow valuation model for Alphabet. I have made several major changes here. Specifically, my estimate for Alphabet's free cash flow decreased for 2026, 2027, and 2028, and decreased for 2029, while my cash flow growth rate increased slightly from 2029 onwards.

In addition, I added the company’s new cash balance and new debt balances to non-operating assets and total debt. Overall, this resulted in a fair value estimate for the stock of $357 compared to the current market price of $283.

Thus, I believe the company is undervalued by about 25%. So, whether you measure it using a discounted cash flow model or use a forward price-to-earnings ratio, Alphabet stock appears to be undervalued.

So, to answer the question, what will I do with my shares in Alphabet and what is my classification of them? Well, first of all, I updated my ranking today. I believe it is a sure buying opportunity when the price is low, and I have high confidence and complete conviction that this rating, and this investment, will lead to a good return compared to the risks you are taking.

I personally own Alphabet shares in my investment portfolio. I have owned it since 2020. And I am keeping my shares. I am not interested in selling any of them. In fact, I became more optimistic about Alphabet's stock today after assessing the results and seeing the updated stock price compared to how I felt about the company just a week ago, before it announced these quarterly financial results.