Alphabet 3Q26 Earnings: Slowing Search Growth, but Cloud and AI Offer Reasons for Optimism

• Alphabet delivered 25% YoY revenue growth in 3Q26, although operating income and diluted EPS missed consensus expectations, partly due to higher costs and unrealised investment losses.

• Search revenue growth slowed to 12% as FX headwinds, tougher comparisons and lower AI Mode monetisation weighed on growth, despite Search queries reaching a five-year high.

• Alphabet is positioning itself for an agentic future through Gemini agents and Universal Commerce Protocol (UCP), with opportunities to monetise AI-driven shopping through advertising and other payment models.

• Google Cloud revenue growth accelerated to 103% YoY, supported by strong AI infrastructure demand, while TPU system sales are expected to become a more meaningful revenue contributor in 2027.

• We maintain our 2028 price target of USD 438, as Alphabet’s continued dominance in Search, accelerating Cloud growth, and renewed AI model leadership support the longer-term investment case, despite near-term earnings revisions.

Revenue in line, but profits miss on higher costs and unrealised losses

Alphabet’s revenue rose 25% year-on-year (YoY) to USD 127.6 billion in 3Q26, broadly in line with consensus estimates of USD 127.9 billion. This marked the company’s 13th consecutive quarter of double-digit revenue growth.

Google Services revenue increased 11% YoY to USD 96.3 billion. Within the segment, Google Search & Other revenue rose 12% to USD 63.4 billion, YouTube advertising revenue grew 9% to USD 11.2 billion, Google subscriptions, platforms and devices revenue increased 11% to USD 14.3 billion, and Network advertising revenue edged up 1% to USD 7.5 billion.

Google Cloud remained the fastest-growing segment, with revenue surging 103% YoY to USD 30.7 billion. Growth was led by Google Cloud Platform (GCP) across AI infrastructure, AI solutions and core GCP services, with TPU system sales also a meaningful contributor.

Operating income rose 30% YoY to USD 40.6 billion but came in 6.0% below consensus estimates of USD 43.2 billion, as both cost of revenue and R&D expenses came in higher than expected.

Diluted EPS came in at USD 2.12, below consensus estimates of USD 2.99. Net income was weighed down by an unrealised loss on Alphabet’s investment in SpaceX following a decline in its share price, which pushed other income and expenses to a loss of USD 8.2 billion. This was a sharp reversal from 2Q26, when unrealised gains on equity securities lifted earnings well above expectations. Excluding the USD 0.55 per share impact from losses on equity securities, diluted EPS would have been approximately USD 2.67, still below consensus estimates given the operating shortfall.

Free cash flow deteriorated further to negative USD 9.1 billion, from negative USD 5.9 billion in 2Q26, as CapEx of USD 51.4 billion outweighed operating cash flow of USD 42.3 billion. Operating cash flow was weighed down by the build-up of inventory for TPU system sales and a USD 5.2 billion payment for a 2018 European Commission fine following the conclusion of the appeal process.

Alphabet kept its full-year 2026 CapEx guidance unchanged at USD 195–205 billion. It continues to expect CapEx to increase significantly in 2027, with further details to come on its 4Q call.

Table 1: Alphabet 3Q earnings

	3Q26	3Q25	Beat/Miss vs Estimate	YoY change
Revenue	127,577	102,346	-0.26%	25%
Operating Income	40,576	31,228	-6.0%	30%
Net Income	26,170	34,979	-28.2%	-25%
Earnings per Share	2.12	2.87	-29.0%	-26%
Source: Alphabet 3Q Press Release, Bloomberg. Data as of 28 October 2026. Figures are in USD millions except percentages and per share amounts.

AI is boosting Search usage, but monetisation has yet to catch up

Google Search & Other revenue growth slowed to 12% YoY in 3Q26 from 17% in 2Q26, even as Search query growth reached its highest rate in five years.

Management cited several drivers of the slowdown. Foreign exchange (FX) was the single largest driver of the deceleration relative to 2Q26. Beyond FX, Search was also affected by vertical-specific dynamics. In retail, some APAC advertisers were affected by the EU’s removal of its duty-free de minimis exemption for low-value parcels. In media and entertainment, ad spend normalised after an unusually strong 2Q26 boosted by the FIFA World Cup. Alphabet also began lapping the acceleration in Search performance that started in 3Q25, a tougher comparison that was flagged on last quarter’s earnings call and will continue to weigh on YoY growth in 4Q26. Finally, the rapid growth in AI Mode queries weighed on revenue, as AI Mode currently monetises at a lower rate than traditional Search.

Alphabet is actively working to monetise AI Mode queries more effectively. Click-through rates for sponsored product listings in AI Mode are already similar to organic listings, suggesting users find these ads relevant. Building on these results, Google is expanding ads in AI Mode to international markets for the first time. It is also launching multi-turn ads in the US, which allow ads to appear as users ask follow-up questions in an AI Mode conversation rather than only after the first query. This matters because many AI Mode queries are upper-funnel, where users are still researching their options. By showing ads across the conversation, Google can capture higher-value commercial intent earlier in the buying journey and stay present as users move towards a purchase decision.

More broadly, AI is strengthening Alphabet’s advertising business. Management attributed the strong query growth to its AI investments driving greater usage, including commercial queries, and noted that the majority of AI Mode queries are incremental, meaning they add to rather than replace traditional searches. Meanwhile, Gemini models are making ads more relevant, with Google’s biggest update to product listing ads in a decade lifting user satisfaction by 19% and more than halving dissatisfaction.

Even so, while part of the slowdown in Search revenue reflects FX, vertical-specific factors and a tougher comparison base, it also shows that AI Mode monetisation has yet to catch up with its rapid growth in usage. Closing this gap is likely to take time. In the meantime, Search revenue growth may settle closer to the 10–14% range seen in 2024 and early 2025, before the acceleration of recent quarters.

Alphabet is building towards an agentic future

The slowdown in Search growth has likely revived fears that AI competitors such as OpenAI’s ChatGPT and Meta’s Muse agent are chipping away at Google’s core business. Investors also worry that agentic shopping could hurt Google’s advertising revenue if AI agents do most of the browsing and never see ads.

Alphabet has taken a deliberate approach to agentic AI. It is first getting the experience right in the enterprise market, through the Gemini agent for Enterprise, where the bar for security, safety and governance is highest. It will then bring these capabilities to Search and the Gemini app’s 1 billion users later this year, and extend them to Chrome, Android and Workspace, with agents acting as a unifying layer across its products.

On monetisation, management believes agents need not cut users out of the shopping journey. Philipp Schindler, Google’s Chief Business Officer, noted that while AI is well suited to automating the “grunt work” of shopping, users still value discovery and consider factors beyond price, such as brand loyalty and customer service. Google is therefore designing its agentic workflows to present users with several options rather than a single answer. For example, an agent searching for insurance could recommend one product while also highlighting another with a lower deductible or a special discount. Since most purchase decisions involve weighing alternatives, this leaves room for advertisers to feature their products within agentic results. Beyond advertising, Google could also monetise agentic experiences through subscriptions and other payment models.

Google is also building the infrastructure for agentic commerce. Its Universal Commerce Protocol (UCP), an open standard that lets AI agents interact with merchants from product discovery through to checkout, is being rapidly adopted by retailers and now enables direct checkout for hundreds of thousands of brands across Google, including Chewy, Nike and Tapestry. Google is combining UCP with its Agent Payments Protocol, an open standard that allows AI agents to make payments securely on a user’s behalf, as it builds for the future of commerce.

Cloud growth accelerates as TPU demand builds

Google Cloud has become a key driver of Alphabet’s growth, with revenue growth accelerating to 103% YoY in 3Q26 from 82% in 2Q26. Management noted strong demand across its product lines. Cloud backlog rose to USD 561 billion from USD 514 billion in 2Q26, with just over 55% expected to be recognised as revenue over the next 24 months.

Cloud operating margin expanded to 36.2% from 23.7% a year ago, but it is likely to come under pressure in the near term. Given the supply-constrained environment, Alphabet began using third-party compute capacity at the very end of 3Q26 and will ramp up usage in 4Q26. Management expects this reliance on third-party capacity to weigh on margins.

Despite these capacity constraints, Alphabet sees strategic benefits in selling TPU systems beyond its own cloud. Deploying TPUs in customer data centres and third-party facilities reduces the need for Alphabet to pre-build its own data centres to host them. It also broadens Alphabet’s addressable market, since some industries hold data on their own premises that cannot be moved to the cloud, and TPU systems allow Alphabet to bring accelerated compute to where that data sits. Selling TPUs more widely also supports economies of scale, with higher production volumes translating into better economics for Alphabet.

TPU system sales are set to become a growing contributor to Cloud revenue. Management expects them to continue scaling in 4Q26, followed by a meaningful revenue ramp in 2027. Nearly 100 customers use TPUs today, including Anthropic and Apple, and Alphabet has recently partnered with Oracle and Crux AI to deliver TPU systems.

In our previous update, we noted that investors should not be overly focused on which model is leading at any given point, as the frontier remains highly dynamic and leadership can shift quickly. This has played out within a single quarter, with Alphabet now back at the frontier. First-week usage of Gemini 4 Argon on Google’s developer platforms ramped up 3.5 times faster than Gemini 3. Gemini 4 Carbon, Google’s strongest frontier model, was announced on the call and outperforms Argon across almost every domain. It now ranks first on the Artificial Analysis Intelligence Index, ahead of Anthropic’s Claude Opus 5.5 and OpenAI’s GPT-6 Astra. Alphabet is also developing distilled versions of Carbon so that it can deploy the model efficiently to its billion-plus users.

Near-term earnings expectations trimmed, but the long-term investment case holds

Alphabet’s shares fell 12.6% to USD 283.82 on 29 October, reflecting investor concerns over slowing Search growth and continued pressure from elevated AI spending.

We lower our 2026 and 2027 EPS projections, given slower-than-expected Search revenue growth. We had expected Search growth to slow in 3Q26 after management flagged the tougher comparison base last quarter, but the 12% growth rate was still lower than we anticipated. We believe Alphabet will maintain its dominance in Search, much as it did when generative AI first emerged and investors feared ChatGPT would erode its core business. However, it will take time for Alphabet to monetise AI search to the same level of profitability as traditional search.

Beyond Search, Alphabet’s longer-term growth drivers remain intact. Cloud growth continues to accelerate, TPU system sales are set to ramp up, and Alphabet has regained its position at the AI frontier. Together with its growing agentic commerce infrastructure, this leaves Alphabet well placed to capture and monetise the shift towards agentic AI over time.

We therefore keep our 2028 EPS projection unchanged, and with it our 2028 price target of USD 438, based on a fair PE of 24x. With upside potential of 54% from the closing price of USD 283.82 on 29 October, we reiterate our Buy recommendation on the stock.

Table 2: Projections for Alphabet’s earnings

Alphabet	2025	2026E	2027E	2028E
Earnings Per Share (EPS)	9.2	13.7	15.0	18.3
Earnings Growth YoY	16.6%	48.6%	9.5%	21.7%
PE Ratio (X)	33.9	20.7	18.9	15.5
Target Price (based on a fair PE of 24X)				438
Upside Potential				54.4%
Source: Bloomberg Finance L.P., iFAST Estimates Data as of 29 October 2026

Figure 1: Share prices are driven by earnings growth in the long run

Declaration:

This research report was prepared with the assistance of artificial intelligence (AI) tools. iFAST Financial Pte Ltd does not rely exclusively on AI for content generation; the content of this report – including all investment theses, ratings, price targets and conclusions – has been independently reviewed and verified by the research analyst(s) to ensure accuracy and professional integrity.

For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) holds a NIL position in the abovementioned securities. The analyst who produced this report holds a position in Alphabet.