What's Going on with Alphabet Stock? 3 Things Investors Should Know
What's Going on with Alphabet Stock? 3 Things Investors Should Know
Lawrence Nga, The Motley FoolMon, November 2, 2026 at 5:05 PM UTC
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Image source: Getty Images.Key Points -
AI mode currently generates less advertising revenue than traditional search.
Google Cloud is emerging as another major growth engine.
Investors need to watch free cash flow and returns on invested capital.
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Alphabet (NASDAQ: GOOGL) delivered another quarter of impressive revenue growth. Its third-quarter 2026 revenue increased 25% year over year to $127.6 billion. Google Cloud more than doubled its revenue, while Google Search continued to grow.
Yet, Alphabet shares came under pressure following the earnings announcement. Investors are increasingly concerned about the company's advertising business and the enormous amount of money it is spending on artificial intelligence.
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So, what's happening with Alphabet? Here are three things investors should understand.
Google's advertising business faces challenge.
Google's advertising business remains its biggest revenue contributor. In the third quarter, Google Search generated $63.4 billion, an increase of 12% from a year earlier. YouTube advertising revenue grew 9% to $11.2 billion.
These are respectable growth rates for businesses of this size. However, investors are increasingly questioning how artificial intelligence could change the economics of traditional search. Google is introducing AI-powered features that allow users to ask more complicated questions and receive comprehensive answers without visiting multiple websites. This makes Google Search more useful, but it also creates a monetization challenge.
During its latest earnings call, Google's management acknowledged that AI Mode queries currently generate less ad revenue than traditional Search queries. This contributed to the slowdown in Search advertising growth during the third quarter.
Google is working to address this by introducing more advertisements into AI-generated responses and expanding these features internationally. However, it remains to be seen whether AI-powered Search can eventually generate advertising revenue at the same rate as traditional Search.
For investors, the important question isn't simply whether people continue using Google. It's whether Google can continue making money from those searches.
Google Cloud is becoming a much bigger growth engine
While investors worry about Search, another part of Alphabet's business is gaining momentum. Google Cloud revenue increased 103% to $30.7 billion in the third quarter. Its operating income also increased substantially, exceeding $11 billion.
Demand for AI computing infrastructure and enterprise AI services is helping drive this growth. Businesses increasingly need computing power, data storage and access to advanced AI models. Google Cloud provides these services, giving Alphabet another opportunity to benefit from the AI boom.
Its cloud backlog also reached $561 billion, providing significant visibility into future demand. Management expects to recognise more than 55% of this backlog as revenue over the next 24 months. This is important because Alphabet is no longer relying entirely on advertising to drive its growth. Google Cloud could become another major source of revenue and profits over time.
However, strong revenue growth doesn't automatically translate into attractive investment returns. The company still needs to demonstrate that it can maintain its growth while generating healthy profits. So far, the numbers suggest it's moving in the right direction, with Google Cloud more than tripling its operating profit in the latest quarter.
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Alphabet is spending enormous amounts on AI.
Perhaps the biggest concern is how much Alphabet is investing to compete in artificial intelligence. The company expects capital expenditures to range from $195 billion to $205 billion in 2026. Management also indicated that spending could increase substantially again next year.
These investments are going toward data centers, servers, networking equipment and other infrastructure needed to support growing AI demand. The spending is already affecting cash flow. Alphabet reported negative free cash flow of $9.1 billion in the third quarter as capital expenditures exceeded the cash generated from operations.
However, this doesn't necessarily mean the business is becoming less profitable. Operating income actually increased 30% to $40.6 billion, with operating margins improving to 32%.
Still, the enormous infrastructure spending deserves attention. Alphabet needs to demonstrate that these incremental investments will generate sufficient additional revenue and profits to justify the capital being deployed.
What should investors make of Alphabet?
Alphabet is undergoing an important transformation. Its traditional advertising business remains enormous, Google Cloud is growing rapidly, and its AI capabilities are creating new opportunities across the company.
However, the transition isn't without risks. AI could change how Google monetizes Search, while enormous infrastructure investments could put pressure on free cash flow.
For long-term investors, three things deserve attention: the resilience of Search advertising, the profitability of Google Cloud, and the returns Alphabet generates from its AI investments. They should keep an eye on all three of these in the coming quarters to track Alphabet's progress in transformation.
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Lawrence Nga has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet. The Motley Fool has a disclosure policy.
Source: “AOL Money”
