Google stock plunges over 11% after earnings: AI spending devours cash flow, search monetization under pressure

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

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

This is not merely a failure at the earnings level, but more like a repricing of the AI trade logic. Commentary from JPMorgan, Goldman Sachs and Morgan Stanley all points to the same conclusion: this earnings report has once again weighed on risk appetite in the AI sector, which had only recently recovered, amplifying market anxiety about 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 was exactly 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 bonds. Meanwhile, Sundar Pichai emphasized that search query growth year over year was the highest in five years, but search revenue growth slowed, and the lower monetization rate of AI Mode became the signal the market feared most.

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

Alphabet CEO Sundar Pichai claimed in the earnings report that year-over-year query volume growth for Google Search "was the highest 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 threshold of about 14%.

In the words of Mark Schilsky on JPMorgan's trading desk, 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 Asia-Pacific retailers' ad spending, 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 ad 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 high base pressure from accelerated growth in the third quarter of 2025.

The only bright spot in the earnings report that exceeded 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 the strong growth in the cloud business failed to fully flow through to group profit.

Alphabet-level shared AI research and development losses 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 the cloud business'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, computing power 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 computing power remains a constraint on further acceleration in the cloud business.

Free cash flow under strain, buybacks at zero, turning to bond issuance 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 consume about $3.5 billion in free cash flow this quarter. The actual figure was close to 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.

More striking is the fundamental shift in the financing structure. In the first three quarters of 2026, Alphabet's share repurchases 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 of common stock (of which $10 billion came from Berkshire Hathaway), $19.1 billion of mandatory convertible preferred stock, and $76.3 billion of 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 directly 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 the improvement in credit market stability and Oracle's earnings may be more decisive for the highly leveraged infrastructure complex than the earnings of any single hyperscaler.

JPMorgan's market intelligence team characterized the earnings report as "a setback for the re-ignition of the AI/tech trade," and noted that premarket price action suggests the broadening rotation trend will continue. The bank cited precedents from earlier in the year: between January and February 20 of this year, the energy sector rose 22%, materials rose 16%, and industrials rose 14%, while tech fell 3.5% and the S&P 500 gained less than 1%. JPMorgan maintained its "tactically bullish" stance, attributing the main risk to 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 about 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 challenges, 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. Risk disclosure and disclaimer

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