After Alphabet, Google's parent company, released its third-quarter earnings report, major Wall Street institutions promptly lowered their price targets. Search business revenue fell short of expectations, compounded by foreign exchange headwinds and persistently high capital expenditures, significantly heightening market concerns over the company's free cash flow outlook.
According to reports, JPMorgan cut its price target on Alphabet from $425 to $375. Goldman Sachs also lowered its 12-month price target from $435 to $385, a reduction of approximately 11.5%, while maintaining its Buy rating. Based on Goldman Sachs' closing price of $324.89 on October 28, the new target implies roughly 18.5% upside.
The earnings report showed that Alphabet's third-quarter Search and Other revenue came in at $63.35 billion, below Goldman Sachs' estimate of $64.2 billion and the consensus estimate of $64.895 billion. Meanwhile, the company maintained its 2026 capital expenditure guidance of $195 billion to $205 billion and signaled that 2027 capital spending would increase substantially further, weighing on the free cash flow outlook and becoming one of the core focal points for investors.
Search Revenue Under Pressure, FX and Comparison Base Create Dual Drags
Alphabet's third-quarter Search and Other revenue grew 12% year-over-year, below market expectations. Management attributed the shortfall primarily to foreign exchange headwinds, while also noting that the company faces a difficult revenue comparison base 鈥?the acceleration in search revenue growth began in the third quarter of 2025, putting pressure on this quarter's year-over-year figures.
Additionally, Goldman Sachs analysts pointed to special factors in several verticals: some Asia-Pacific retailers were affected by the EU's removal of the minimum tax exemption policy, while media and entertainment advertising spending normalized after the conclusion of the 2026 World Cup. Management stated that foreign exchange headwinds in the fourth quarter are expected to be slightly larger than in the third quarter, and comparison base pressures will persist.
For the full quarter, Google Services total revenue was $96.3 billion, below Goldman Sachs' estimate of $97.575 billion; YouTube advertising revenue was $11.207 billion, also falling short of expectations. GAAP earnings per share came in at $2.12, significantly below Goldman Sachs' estimate of $2.96, impacted by approximately $8.7 billion in losses from fair value fluctuations on the company's equity holdings.
Cloud Business Strong, AI Demand Drives Revenue Beat
The cloud business was the biggest highlight of this quarter's earnings. According to Goldman Sachs data, Google Cloud third-quarter revenue reached $30.709 billion, up approximately 103% year-over-year, beating Goldman Sachs' estimate of $29.556 billion by about 3.9% and the consensus estimate by about 5.7%, with operating margin expanding approximately 1,250 basis points year-over-year to 36.2%.
Management disclosed that Google Cloud's revenue backlog has now reached $561 billion, up 256% year-over-year, with approximately 55% expected to convert to revenue within the next 24 months. Goldman Sachs' report noted that enterprise AI demand is robust 鈥?including significant contributions from TPU system sales, with nearly 100 customers currently using TPUs and further volume growth expected in the fourth quarter and 2027. Management also stated that insufficient compute resource supply remains a key bottleneck constraining further acceleration in cloud business growth.
On the subscription side, management disclosed that YouTube Premium has surpassed 150 million subscribers, with overall subscription revenue growing faster than the advertising business, and demand for Google One AI plans also remains strong.
High Capital Expenditures, Negative Free Cash Flow Draws Attention
Alphabet maintained its 2026 capital expenditure guidance of $195 billion to $205 billion, with Goldman Sachs' updated estimate at approximately $203 billion. For 2027, the company has not yet provided specific guidance but explicitly stated that spending will "increase substantially," with Goldman Sachs projecting approximately $350.4 billion.
Against this backdrop, Goldman Sachs further adjusted its 2027 free cash flow estimate for Alphabet from a previous -$40.567 billion to -$40.567 billion, while 2026 free cash flow has already turned negative (-$12.62 billion), a dramatic reversal from $73.266 billion in 2025. Depreciation and amortization expenses are also rising sharply, with Goldman Sachs projecting $38.774 billion in 2026 and a jump to $75.017 billion in 2027.
Management stated that it expects return on invested capital (ROIC) to remain well above the cost of capital but acknowledged that the current divergence between free cash flow and large-scale investment will persist for some time until compute constraints are alleviated.
Goldman Sachs Cuts Price Target, Maintains Buy Rating
Goldman Sachs lowered its 12-month price target from $435 to $385, mainly reflecting downward revisions to forward earnings estimates and a slight contraction in valuation multiples. In terms of valuation methodology, Goldman Sachs uses an equal-weighted blend of 50% EV/GAAP EBIT and 50% adjusted DCF (EV/FCF-SBC), with the EV/GAAP EBIT multiple lowered from 26x to 24x to reflect lower forward earnings estimates, while maintaining the multiple-to-growth ratio of approximately 0.80x unchanged.
On earnings estimates, Goldman Sachs lowered 2026 EPS from $20.54 to $19.76, 2027 EPS from $15.50 to $15.01, and 2028 EPS from $19.15 to $18.53. At the current stock price, GOOGL trades at approximately 18x Goldman Sachs' 2027 GAAP EPS estimate (excluding net cash) and approximately 15x the 2028 estimate.
Goldman Sachs analyst Eric Sheridan's team noted in the report that they remain bullish on Alphabet's strategic positioning in AI consumer and enterprise computing over the long term, believing it possesses both AI-scale distribution capabilities (an app portfolio with over 1 billion users) and large-scale compute investment advantages 鈥?a dual narrative that is undervalued by the market as AI monetization evolves from the "infrastructure layer" to the "platform layer" and "application layer." Key downside risks include: search business disruption from industry shifts, long-term margin pressure from heavy asset investment, intensifying regulatory scrutiny, and macro environment impacts on growth stock valuations.
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