Third-quarter revenue rose 25%, ignoring currency moves, to $127.6bn ($128.2bn expected). The core advertising business, which includes Google Search and YouTube, saw revenue rise by 11% to $82.0bn. Google Cloud revenue rose 103% to $30.7bn.
Operating income rose 30% to $40.6bn ($43.2bn expected), supported by growth across Google Services and a big improvement in Google Cloud profitability.
There was a free cash outflow of $9.1bn. Net cash, including leases, was $123.2bn at quarter-end.
Capital expenditure guidance for 2026 is unchanged at $195-205bn, and 2027 is still expected to see a significant increase.
The shares were down 10.1% in after-hours trading.
Our view
Alphabet's latest quarter showed just how much the investment case still rests on Search. Cloud delivered another standout performance, but a slowdown in Search was enough to knock confidence, and the market's reaction shows how little patience there is for anything that looks like a crack in the core business.
The slowdown has some sensible explanations, and we should be clear that 12% growth is still a good number. But the slowing trend has brought disruption fears back. People are using Google Search more than ever, but newer AI-powered searches aren’t as lucrative as traditional ones.
Alphabet is now rolling out ads more widely across its AI products to close that gap, and early signs are encouraging, with ad performance on AI surfaces holding up well against traditional search. But until the numbers prove it, worries that AI is eating into Search are now back in the limelight.
Cloud remains the clearest growth engine. Revenue more than doubled, the order backlog keeps growing, and margins continue to show that AI investment can earn attractive returns. Selling its own custom chips to other companies adds a new revenue stream and is a clear vote of confidence in the technology, though more expensive third-party capacity and a shift towards shorter-lived assets could put some pressure on profitability in the near term.
That ties into the bigger theme of rising costs. Keeping up at the frontier of AI models is becoming more expensive, and investment is set to step up again next year. Free cash flow remains negative, and the capital-light model of old is giving way to something far more infrastructure-heavy. Alphabet has the balance sheet to support that, but the question of whether future returns justify the spending won't go away quickly
We continue to believe that Alphabet has plenty of ways to win from AI. The market has focused on Search slowing, overlooking a transformation that underpins expectations for 30% operating profit growth. We expect robust Search growth to pair with rapid acceleration in the cloud business, and Alphabet’s optionality across the full AI stack remains a key advantage.
That said, narrative is important, and investors are rewarding the clean stories. We’re very conscious that the Alphabet investment case has become messy again and that the valuation now reflects a healthy slice of scepticism. Search needs to show that new AI formats can pay their way, and that may take a few quarters to play out.
Environmental, social and governance (ESG) risk
The technology sector is generally medium/low risk in terms of ESG, though some segments are more exposed, like Electronic Components (environmental risks) and data monetisers (social risks). Business ethics tend to be a material risk within the tech sector, ranging from anti-competitive practices to intellectual property rights. Other key risks include labour relations, data privacy, product governance and resource use.
According to Sustainalytics, Alphabet’s overall management of material ESG issues is strong.
Monopoly and market dominance concerns are a key regulatory risk. It remains the subject of antitrust investigations in several countries, leading to calls from both EU and US regulators for the breakup of its online advertising business. Alphabet’s management of data handling is strong, aided by its deep pockets. But this remains a key risk to monitor in the evolving landscape of AI.
The author holds shares in Alphabet.
Alphabet key facts
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This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by LSEG. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.
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