What's Going on with Alphabet Stock? 3 Things Investors Should Know

Alphabet's stock has been a topic of interest among investors lately. The company reported a 25% year-over-year increase in revenue to $127.6 billion for the third quarter of 2026. Their Google Cloud division saw significant growth, with revenue surging 103% to $30.7 billion. Additionally, Google Search, a major contributor to Alphabet's revenue, saw a 12% increase in ad revenue, reaching $63.4 billion. However, despite these positive figures, Alphabet's shares experienced a decline following the earnings announcement.

Investors are primarily concerned about Alphabet's advertising business, especially Google Search, which remains the company's primary revenue driver. Google Search generated $63.4 billion in ad revenue, a 12% increase from the previous year. Yet, the rising influence of artificial intelligence (AI) in search is raising concerns.

Google has introduced AI-powered features in Search, allowing users to ask more complex questions and receive comprehensive answers without visiting multiple websites. This innovation is beneficial for users but presents a challenge for monetization. Google's management acknowledged that AI Mode queries generate less ad revenue than traditional Search queries, contributing to a slowdown in Search advertising growth during the third quarter.

Another promising area for Alphabet is its Google Cloud division. The company's revenue in Google Cloud increased 103% to $30.7 billion, and its operating income reached an impressive $11 billion. This growth is largely attributed to the increasing demand for AI computing infrastructure and enterprise AI services. Google Cloud's backlog has reached $561 billion, indicating substantial future demand.

Management expects to recognize over 55% of this backlog as revenue over the next two years. This growth is significant as it diversifies Alphabet's revenue streams beyond just advertising.

However, Alphabet's massive investment in AI is a potential concern. The company expects to spend between $195 billion and $205 billion on capital expenditures in 2026, with the possibility of further increases in the following year. These investments are primarily focused on data centers, servers, and networking equipment to support the growing AI demand.

While these investments have impacted Alphabet's cash flow, negatively impacting free cash flow in the third quarter, operating income has risen by 30% to $40.6 billion, with operating margins improving to 32%. Investors are keenly watching how Alphabet balances these substantial AI investments with maintaining healthy profits and ensuring the resilience of its traditional advertising business, specifically Google Search.