Alphabet Inc. shares dropped 13% in Thursday's trading session after the company reported third-quarter revenue and earnings that fell short of Wall Street expectations, intensifying concerns that artificial intelligence is disrupting its core search advertising business. If the decline holds, it would mark the steepest one-day fall since March 2020 and the worst post-earnings reaction since the company's 2004 IPO.
The tech giant posted total revenue of $127.6 billion, below the $128.2 billion analysts had projected, according to LSEG data. Earnings per share came in at $2.12, significantly missing the consensus estimate of $3.02. The company also reported negative free cash flow of $9.07 billion, far worse than the expected $2.70 billion, as capital expenditures surged to fund AI infrastructure.
Search advertising, Alphabet's largest revenue source, grew 12% year-over-year to $63.35 billion in the September quarter, but that growth rate decelerated from 17% in the prior quarter and missed analyst expectations. The slowdown has reignited worries that AI-powered competitors like OpenAI's ChatGPT and Meta's AI agents are eroding Google's dominance in search.
While Google Cloud revenue more than doubled to $30.71 billion, the strong performance failed to reassure investors. The market's reaction underscores the limited tolerance for disappointing results from companies spending heavily on AI infrastructure, as noted by JPMorgan analyst Doug Anmuth, who retained an Overweight rating and a $375 price target.
Search deceleration raises monetization questions
Bernstein analyst Mark Shmulik described the initial read on Alphabet's results as offering far more negatives than positives, calling the deceleration in search growth "material." He questioned why an increase in search queries was not translating into revenue growth at the same rate as in previous quarters.
Alphabet attributed part of the slowdown to currency fluctuations and acknowledged that queries conducted through AI Mode are, on average, three times longer than traditional searches but currently generate lower monetization. The company faces the challenge of proving that AI-powered search can generate sufficient advertising revenue to offset changes in how users discover information and shop online.
Raymond James lowered its price target on Alphabet to $350 from $400 while maintaining a Strong Buy rating. The firm noted that AI Mode's lower monetization rate puts pressure on Alphabet to demonstrate that potential structural gaps in advertising load can be offset by improved conversion rates from richer context and a broader query universe. Raymond James also highlighted the company's capital expenditure outlook, estimating $350 billion in spending, above the market's $320 billion estimate.
Analysts trim targets but stay bullish
Several other firms reduced their price targets while retaining positive ratings. Susquehanna cut its target to $400 from $460, maintaining a Positive rating, and raised its 2026 net revenue estimate by 2% while reducing its GAAP EPS estimate by 4%. Cantor Fitzgerald's Deepak Mathivanan lowered his target to $350 from $420, keeping an Overweight rating, and pointed to the earnings miss and slowing search growth but cited cloud growth above 100%, record search queries, and strong demand for tensor processing units as supporting Alphabet's AI positioning.
Rosenblatt analyst Barton Crockett reduced his target to $380 from $410, maintaining a Buy rating, and said strong cloud performance was overshadowed by disappointing search results. Rosenblatt expects Google Cloud revenue to surpass the combined revenue of Search and YouTube by 2028, suggesting the company's value is shifting from advertising toward cloud computing.
BNP Paribas analyst Nick Jones wrote that the results likely revived fears that AI competitors are chipping away at Google's search business. Investors are also concerned that agentic shopping experiences could threaten advertising revenue if AI agents increasingly handle web browsing and purchasing decisions.
Despite the negative reaction, analysts remain optimistic about Alphabet's long-term prospects, betting on cloud growth and AI innovation. The consensus is that the company's heavy investment in AI infrastructure will eventually pay off, but near-term volatility is likely as investors digest the slower search growth and rising costs.
This article is for informational purposes only and does not constitute financial advice.
