Google's stock price plunged over 11% after its earnings report, as AI investment devours cash flow and buybacks drop to zero

Google suffered its worst single-day plunge in history on Thursday, with shares plummeting more than 11%, wiping out roughly $500 billion in market value, and forming a "death cross" during the session—that is, the 50-day moving average falling below the 200-day moving average—while also dragging down the broader tech sector and pressuring the Nasdaq lower.

Alphabet's latest earnings report struck the market's most sensitive nerve: AI spending continues to devour cash flow, share buybacks have dropped to zero, and the pricing power of the core search business is also coming under pressure. According to Bloomberg consensus estimates, Google Search, YouTube, subscriptions, and Google Services all fell short of expectations; group operating profit came in at $40.6 billion, below the market's expected $43.2 billion and also below the buy-side threshold of roughly $45 billion.

Commentary from JPMorgan, Goldman Sachs, and Morgan Stanley all pointed to the same conclusion: this earnings report has once again weighed on risk appetite in the AI sector, which had only recently begun to recover, amplifying market anxiety over the returns on AI capital expenditure at large tech companies. JPMorgan bluntly called it "a setback for the re-ignition of the AI/tech trade."

Goldman Sachs trader Thales Arruda noted that the market is shifting from "rewarding capex growth" to "demanding evidence of returns."

Alphabet's report delivered the opposite. The company's free cash flow burn far exceeded expectations, buybacks fell to zero in the first nine months of 2026, and it raised funds by selling shares and issuing debt.

Meanwhile, Sundar Pichai emphasized that search query growth year over year reached its highest level in five years, but search revenue growth slowed, and the lower monetization rate of AI Mode became the signal that worried the market most.

The contradiction in this earnings report that unsettled the bulls most was hidden in a comparison of figures.

Alphabet CEO Sundar Pichai claimed in the earnings report that year-over-year query volume growth for Google Search "is the highest it has been in the past five years." However, Search and other revenue grew only 12% to $63.35 billion, a sharp pullback from 16.8% in the second quarter and 19.1% in the first quarter, and also clearly below the buy-side expectation threshold of roughly 14%.

In the words of JPMorgan trading desk's Mark Schilsky, this means "Google is answering more questions than ever, but getting paid less and less for each one."

Management offered multiple explanations. Chief Business Officer Philipp Schindler cited exchange rates as "the single largest drag on the search business relative to the second quarter," while Goldman Sachs' TMT team added two vertical-specific factors: the EU's removal of the de minimis exemption hit advertising spending by Asia-Pacific retailers, and media and entertainment ad spending normalized after the end of the FIFA World Cup.

But what the market is really worried about is the erosion of search monetization by AI Mode. Schindler acknowledged that AI Mode has a "lower monetization level," while insisting that "the majority of AI Mode queries are incremental and will create more monetization opportunities over time."

Barclays analyst Ross Sandler noted that management is "prioritizing user experience over monetization," that growth in blue-link queries is slower than total query growth, and that more aggressive agentic search processes next year could widen this gap further. He characterized this as a "yellow flag" for investors.

Morgan Stanley noted that the gap between Alphabet's search growth and Meta's ad growth has widened to a recent peak of about 13 percentage points, reinforcing market concerns about advertising share migration and AI-driven diversion.

YouTube also failed to provide a buffer, with revenue growth of 9.2%, falling below the 10% watch line previously cited by JPMorgan's Mark Schilsky.

Looking ahead to the fourth quarter, CFO Anat Ashkenazi warned that currency headwinds will widen further, while the search business will also face tough comparables from accelerated growth in the third quarter of 2025.

The only bright spot in the earnings report that beat expectations came from Google Cloud.

Cloud revenue doubled year over year to $30.7 billion, and the segment's operating margin jumped from 23.7% to 36.2%, far exceeding market expectations of about 33%, with nearly 100 customers already using TPUs. Cloud backlog reached $561 billion, up 256% year over year, and the company said about 55% will convert into revenue over the next 24 months. Nearly 100 customers are using TPUs.

But the problem is that Cloud's strong growth failed to fully flow through to group profit.

At the Alphabet level, the shared AI research and development loss widened from $4.5 billion a year earlier to $7.7 billion, and Other Bets lost another $2 billion. By rough estimate, about half of Cloud's incremental profit was consumed before reaching the consolidated income statement.

Goldman Sachs analyst Eric Sheridan summarized this phenomenon in his quarterly review as "search slowing, compute still requiring investment." He noted that management continued to emphasize leadership in frontier models, including the release of Genie 4 and Gemini C4 Carbon, while also acknowledging that available compute remains a constraint on further acceleration in Cloud.

Free cash flow under strain, buybacks at zero, turning to debt and share sales

Perhaps the most shocking information in this earnings report did not come from the income statement, but from the financing activities disclosure.

The market had originally expected Alphabet to burn about $3.5 billion in free cash flow this quarter. The actual figure was nearly three times that expectation. Capital expenditures were $51.4 billion, below the market expectation of $55.8 billion, but operating cash flow fell 13% year over year to $42.3 billion, far below the market expectation of $53.9 billion. Capital expenditures doubled within a year, while operating cash flow went backwards.

Even more striking is the fundamental shift in the financing structure. In the first three quarters of 2026, Alphabet's share buybacks amounted to zero—compared with $39.8 billion in the same period of 2025. At the same time, the company sold 12 million Class A shares (raising $4.3 billion) and 24 million Class C shares (raising $8.1 billion) through at-the-market (ATM) programs, issuing a total of $12.4 billion in new shares, with $27.6 billion remaining under the ATM programs. In addition, the company issued $28.7 billion in senior unsecured bonds, and quarterly interest expense soared from $143 million a year earlier to $967 million.

By comparison, in the first three quarters of 2025, Alphabet returned $44.4 billion to investors through financing activities; in the first three quarters of 2026, the company had net financing of $115.8 billion, including $42.9 billion in common stock (of which $10 billion came from Berkshire Hathaway), $19.1 billion in mandatory convertible preferred stock, and $76.3 billion in net new debt.

Management said it expects the return on investment to be "significantly above the cost of capital." But the cost of capital itself has already been rising: Alphabet sold shares at an average price of about $358 for Class A shares and $338 for Class C shares, while the premarket share price was about $290, meaning the company completed its financing at a price 15% to 20% above the current market price—perhaps the best deal it made this quarter.

The market impact of this earnings report has gone beyond Alphabet itself, striking at the core of the entire AI investment logic.

Goldman Sachs trader Thales Arruda noted in his morning note that the market is undergoing a shift from "rewarding capital expenditure growth" to "demanding evidence of returns," and described the current "pain trade" as hyperscalers underperforming the broader market while de-risked "picks and shovels" names begin to gain momentum. He also noted that improving credit market stability and Oracle's earnings may be more decisive for the highly leveraged infrastructure complex than the earnings of any single hyperscaler.

The bank cited precedent from earlier in the year: between January and February 20 this year, the energy sector rose 22%, materials rose 16%, industrials rose 14%, while technology fell 3.5%, and the S&P 500 as a whole gained less than 1%. JPMorgan maintained its "tactically bullish" stance, arguing that the main risk comes from an escalation of geopolitical conflict in the Middle East rather than the earnings themselves, and said it would buy on dips.

On analyst price targets, several institutions lowered their targets while maintaining their ratings: Bernstein cut from $385 to $325, BofA from $430 to $380, JPMorgan from $425 to $375, Morgan Stanley from $400 to $375, Barclays from $425 to $405, and Susquehanna from $460 to $400. Citizens was the only institution to downgrade the stock to "market perform." Even after the cuts, the median analyst price target is still about 30% above the premarket price.

BofA noted that at about $291, Alphabet shares trade at roughly 19 times 2027 earnings and about 16 times 2028 earnings, with the core search business valued at only about 10 times. This may be a buy signal, provided the market believes the 2028 earnings forecasts are credible and that no other competitor eats into this pie first.

And just as Alphabet struggles with monetization difficulties, Microsoft Azure grew faster than expected and guided to 49% to 50% growth at constant currency next quarter. This contrast makes the logic of winner differentiation in AI infrastructure investment increasingly clear.

This article is from the WeChat public account "Wall Street Insights," author: Zhao Ying, published by 36Kr with authorization.