Key Takeaways
- Alphabet shares fell 12% today after Search revenue missed estimates and free cash flow came in at negative $9.1 billion.
- Search queries grew at their fastest pace in five years, yet Search revenue growth slowed to 12%, a bigger worry than Google Cloud’s 103% growth.
- Microsoft stayed cash-positive on the same AI build-out, while Nebius, CoreWeave and IREN fell as neither giant raised its capex forecast.
Alphabet (GOOGL) is down 12% today after its third-quarter report, on pace for its worst post-earnings reaction ever. DA Davidson summed up the mood: “Is This the Quarter We Feared?”
Microsoft (MSFT) is flat-ish (down about 1%). And Nebius (NBIS), CoreWeave (CRWV) and IREN (IREN) are down 5%, 3% and 6%, as neither giant raised its spending forecast.
Search is the real problem
Search & other revenue grew 12% to $63.4 billion, about $1.5 billion short of estimates, as Bloomberg’s Ed Ludlow pointed out. Growth was 17% in the second quarter and 19% in the first.
And people are searching more than ever. CEO Sundar Pichai said “our year-over-year query growth rate is the highest it’s been in the last five years.”
Management named currency as the biggest factor in the slowdown. Chief business officer Philipp Schindler also pointed to lower monetization in AI Mode, where Google is only now scaling up ads.
That second part worries me more. It’s the first real sign that as searches move to AI answers, each one earns less.
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The cash burn is Alphabet’s own pace
Free cash flow has been negative for two straight quarters, and the hole got deeper:
Capex hit $51.4 billion, and Alphabet kept its $195 billion to $205 billion forecast for the year. That means another $63 billion to $73 billion in the fourth quarter. To pay for it, Alphabet sold $12.4 billion of stock and $28.7 billion of notes, and bought back none.
Microsoft is spending on the same build-out. Its September-quarter free cash flow fell 27% to $18.6 billion but stayed positive. Microsoft said part of the reason its capex came in under estimates was third-party capacity arriving late. For Nebius, CoreWeave and IREN, that pushes revenue out, though demand looks intact: Microsoft’s commercial backlog grew 73% to $677 billion.
Cheaper, for a reason
After the drop, Alphabet trades below its usual multiple:
It closed yesterday at 22x forward earnings, against a five-year average of 23x, and today’s drop takes it to about 20x.
So, is this the quarter we feared? For Search, it might be. Cloud is doing its job, with revenue up 103% to $30.7 billion and its operating margin up to 36% from 24%. But Search pays for the build-out, and I’d wait for it to steady before buying the dip.
Of course, if currency really did most of the damage, today’s price will look like a gift by the next report.
So what is Alphabet stock actually worth?
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