Internet Software/Services · #33 in the Retail 100

Alphabet Class C

GOOG

Our rating: hold
12-month target: $339.13 +22.0%
Expected vs. S&P 500: +3.8 ptsSee the math
Next earnings: Feb 3In 90 days

Alphabet has stopped buying back stock and sold $12.4B of new shares in one quarter, because its ad cash no longer covers the AI buildout.

Summary

Alphabet earns most of its profit from Google Search ads, and YouTube is a second large business. It is spending heavily on data centers and its own AI chips and rents that capacity out through Google Cloud, now about a quarter of revenue. Search growth slowed to 12% last quarter, and free cash flow turned more negative. The stock depends on Cloud profit catching up with spending while Search keeps growing.

$278.30

-$5.82 (-2.05%)Past year

What Alphabet Class C does

Alphabet runs Google Search and sells ads beside the results to advertisers who pay when someone clicks. That business funds the rest, including YouTube, Google Cloud and the Gemini AI models.^6,22

What it sells

Search ads50% of revenue, Q3 2026
Ads beside search results, plus ads in Gmail, Maps and Google Play. More searches and higher prices per click drive Alphabet's revenue.
Google Cloud24% of revenue, Q3 2026
Rents computing power, Google's own AI chips and Gemini models to companies, sells Workspace office apps, and now sells TPU systems.
Subscriptions and devices11% of revenue, Q3 2026
YouTube Premium, YouTube TV, Google One storage, Google Play app fees and Pixel phones.
YouTube ads9% of revenue, Q3 2026
Ads before and during YouTube videos. Advertisers buy them both to sell directly and to build their brands.
Google Network6% of revenue, Q3 2026
Ads Google places on other companies' websites and apps, sharing the money with those publishers.

Who buys it

Advertisers of every size buy most ads through Google's self-serve tools. Cloud customers include AI labs such as Anthropic, which rents Google's AI chips. The U.S. was 53% of Q3 2026 revenue, and Europe, the Middle East and Africa 26%.

Where you've seen it

Ads on many news sites and phone apps are placed by Google, which splits the money with the publisher.

The backstory

When chatbots took off, the worry was that they would replace Google Search, whose ads pay for most of Alphabet. Management says Search query growth is now the highest in five years, though revenue growth slowed to 12%. Alphabet's response is to spend its ad cash on data centers and its own AI chips, put Gemini inside Search and rent capacity through Google Cloud.

How the business makes money

Why Google's search ads are paying for its AI build^{1,3,6,16,22,25}

Step 1
People search on Google, and advertisers pay each time someone clicks an ad beside the results. Search revenue rose 12% last quarter.
Step 2
YouTube adds a second stream: ads rose 9% to $11.2B in Q3, and subscriptions, platforms and devices grew 11%.
Step 3
That ad cash goes into data centers and Google's own AI chips, called TPUs, which management says cost less than relying only on Nvidia. Alphabet spent $51.4B in Q3.
Step 4
Google Cloud rents that computing power to companies and AI labs. Cloud profit tripled to $11.1B in Q3.
What shareholders get
Spending now exceeds the cash coming in, so buybacks stopped and Alphabet sold new stock and bonds. The stock is betting the AI build pays off while Search keeps growing.

Advantages

Its own AI chips

Major advantage

Alphabet's most distinctive asset. Google has designed its own AI chips, called TPUs, for a decade and now rents them to outside AI labs.^3,6,12

Billions of users to put AI in front of

Strong advantage

A big head start, because AI arrives inside products people already use. The Gemini app has reached 1B users, and management says Search query growth is the highest in five years.^22,25

Ad cash to pay for the buildout

Strong advantage

Strong, though spending now exceeds it. Q3 operating cash flow was $42.3B, mostly from ads. Alphabet held $265.1B of cash and marketable securities at September 30.²²

What's changing

Alphabet is now paying for its AI build with outside money

Alphabet reported on October 28, and the stock fell 12.6% the next day as Search growth slowed and free cash flow worsened. In Q3 it sold $28.7B of notes and $12.4B of new stock. On September 2, a judge declined to break up Google's ad tech business, ordering changes to its conduct instead. Both sides are appealing the search case.^{4,13,14,22,25,27}

Competitors

Who else an investor would consider, and how they compare.

Company	Market value	What it does	Compared with Alphabet
Alphabetthis stock	$3.41T	Alphabet runs Google Search and sells ads beside the results to advertisers who pay when someone clicks. That business funds the rest, including YouTube, Google Cloud and the Gemini AI models.
MicrosoftMSFT	$3.96T	Rents cloud computing to businesses already using its Office and Windows software.	Azure is a bigger cloud than Google's, sold alongside Microsoft's business software.⁷
Amazon (AWS)AMZN	$2.69T	AWS is the largest cloud, renting computing and storage to businesses.	AWS is bigger; Google Cloud grows faster and has more signed contracts.⁸
Meta PlatformsMETA	$1.61T	Sells ads across Facebook, Instagram and WhatsApp, targeted by users' interests.	Meta grows ads faster; Alphabet also rents out its AI computing through Google Cloud.⁹
OpenAI (private)private	—	Makes ChatGPT, the leading AI chatbot, and sells its models to businesses.	ChatGPT is the main threat to Search; Google reaches more people through Search and Android.¹⁶

Bull vs. bear: two bets on the same stock

1
A share is a small slice of the company. Its value comes from the profits the company will make in the future.
2
Nobody knows those profits yet. Buyers (bulls) pay today's price betting they'll beat what most people expect. Sellers (bears) bet they'll fall short.
3
When results come in, the price moves toward whichever side was right, and that side makes money.

The question they disagree on

Will Google Cloud grow profitably enough to bring quarterly free cash flow back above zero within a year, as spending rises again in 2027?^{3,5,6,12,15,22,23,25,26}

Bull case: why buyers buy

Cloud turns its $561B of signed contracts into profitable revenue, so the spending pays for itself and free cash flow turns positive again.

Cloud is now highly profitable. Cloud operating profit tripled to $11.1B in Q3.
Much of Cloud's future revenue is already signed. Management expects just over 55% of the backlog to become revenue within 24 months.
People are searching more. Management says Search query growth is the highest in five years, and Gemini's app has reached 1B users.
Outside AI labs want Google's chips. Anthropic committed to Google's chip capacity from 2027, and management expects TPU system sales to ramp meaningfully in 2027.

Bear case: why sellers sell

If spending keeps rising faster than Cloud profit while Search slows, Alphabet has to keep selling stock and bonds, and buybacks stay on hold.

Search is slowing. Search revenue growth fell to 12% from 17%, and management says AI Mode ads earn less per search so far.
The spending isn't done. Management said capital spending will increase significantly in 2027, with no number yet. Free cash flow was negative $9.1B in Q3.
Shareholders and lenders now fund the build. Alphabet issued new stock in Q3, bought none back, and long-term debt reached $125.1B.
Reported earnings swing with its investments. An $8.7B loss on stock stakes, mostly SpaceX, cut Q3 earnings by $0.55 a share.

Where Delphi landsholdWe think today's price already weighs both sides fairly.See why

What to watch

The numbers that will settle the debate.

Google Cloud growth and operating margin▲ improving

Up 103% to $30.7B in the third quarter, a 36.2% operating margin^22,25

Shows whether the spending is turning into profitable sales, after management warned of near-term margin pressure from using third-party capacity.

Free cash flow▼ worsening

Negative $9.1B in the third quarter, from negative $5.9B in the second²²

Shows whether ads still fund the buildout. It was still $19.7B over the 12 months to September.

Search and YouTube revenue growth▼ worsening

In the third quarter, Search rose 12% to $63.3B, YouTube ads 9% to $11.2B, and subscriptions, platforms and devices 11%^22,23

Shows whether the cash that funds the buildout holds up as chatbots compete for attention. Search grew 17% in Q2.

Next earnings report

Feb 3

In 90 days

Expected earnings per share: $3.24
Expected revenue: —

What to listen for: Alphabet's first number for 2027 capital spending, and whether Search growth stabilizes near 12% while Cloud holds a margin above 30%.^31,25

What would prove this wrong

✕Search revenue growth falls below 10%, or AI Mode ads keep earning less.
✕Cloud growth slows sharply while 2027 capital spending rises again.
✕Free cash flow stays negative through 2027, forcing more stock and bond sales.
✕An appeals court orders a Chrome sale or bans Google's default-search payments to Apple.
✕Anthropic or Meta moves its chip commitments to Nvidia or its own chips.

Our ratingHoldas of Nov 2 close, $278.04 · what ratings mean

Cloud demand is strong, but slowing Search and negative free cash flow offset it, so expected gains roughly match the S&P 500.

12-month target: $339.13 (+22.0%)
Plus dividend: +0.3%
S&P 500, same method, with dividends: +18.5%
Expected vs the market: +3.8 points

The math behind the recommendation

Three 12-month price scenarios, weighted by probability, compared with the S&P 500 under the same method.

Now $278.04

Target $339.13

bull case25% likely

$424.69 +53%

Cloud keeps growing above 50% with operating margins above 30%, so the spending pays for itself and free cash flow turns positive in 2027.

$19.43 earnings per share × 21.9 = $424.69

base case50% likely

$336.45 +21%

Cloud growth slows but stays profitable and earnings match analyst forecasts, while free cash flow hovers near zero as spending keeps rising.

$17.37 earnings per share × 19.4 = $336.45

bear case25% likely

$258.94 -7%

Spending outruns Cloud profit while Search growth keeps slowing, leaving free cash flow negative and Alphabet selling stock and bonds.

$16.44 earnings per share × 15.8 = $258.94

Why these odds: Estimates for 2027 rose about 2% in the 90 days before the report. Since then Q3 earnings missed, Search slowed and free cash flow worsened, but Cloud doubled. Evidence is balanced, so bull and bear odds are equal.

How the prices are built: Wall Street expects earnings per share of $17.37 for the year starting a year from now (analysts range from $15.50 to $21.48). Today the stock trades at 18.5 times next year's earnings per share; its five-year middle is 21.87.^{22,25,27,28,29,30}

What tests the call: Q4 2026 earnings: first 2027 spending number, Search growth, Cloud margin and free cash flow (Feb 3)

Buy means expected to beat the S&P 500 by 10+ points over 12 months; Sell means expected to trail it by 10+. Inputs gathered Oct 29; the recommendation updates with the price every day. Model-generated, not personalized investment advice. How ratings work · Track record

What the price assumes

At $278.04, Alphabet Class C is priced about like the average stock

Alphabet Class C trades at 19 times the earnings analysts expect over the next 12 months. That ratio is the multiple: what investors pay today for each dollar of a year's earnings. That is cheaper than it has been 80% of the time over the past five years, when the middle was 22.

Analysts expect earnings to grow about 16% the year after, against about 16% for the S&P 500. The S&P 500 trades at 19 times. The price assumes Alphabet Class C's earnings grow roughly in line with forecasts, with no premium for doing better.

Alphabet Class C multiple: 19×
S&P 500 multiple: 19×
Base case: +21%
Bear case: −7%

The skewOur bear case loses about 33¢ for every $1 our base case makes. That ratio, how much you stand to lose against how much you stand to make, is the skew.

Last earnings

Q3 2026 results, reported Oct 28

Cloud revenue doubled to $30.7B, but earnings missed, Search growth slowed to 12% and free cash flow fell to negative $9.1B.^{22,23,24,25,26}

Reported Oct 28	Expected	Actual	Difference
Earnings per share	$2.96	$2.12	-28.4%
Revenue	—	—	—

Beat expectations in 6 of the last 7 quarters

Stock reaction: -12.6% next day ($283.82 close on Oct 29)

Why the stock moved

Down: earnings of $2.12 missed the roughly $3.01 estimate. An $8.7B investment loss explains $0.55 of the gap.
Down: Search grew 12%, below the roughly 15% expected, from 17% in Q2. Management blamed currency and AI Mode.
Down: free cash flow was -$9.1B, with no buybacks and $12.4B of new stock sold. No 2027 spending number.
Offset: Cloud revenue rose 103% with a 36.2% margin, and signed Cloud contracts grew to $561B.

What it means for the stock: It strengthened the Cloud case but weakened the funding case. Search slowed and Alphabet is raising outside money, so the debate is how fast Cloud profit can catch up.