Goldman Sachs and JPMorgan Cut Alphabet Price Targets as Search Growth Slows Amid Surging Capital Expenditure
nashnova research
Alphabet fell roughly 10% after hours on slowing search ad growth of 12% and a free-cash-flow swing to negative, prompting Goldman to cut its target to $385 while keeping a buy rating — Wall Street's message: short-term pain, but still worth a seat at the table.
Why did search ads "stall"?
Q3 search and other revenue hit $63.35 billion, up 12% year-on-year — down from 17% last quarter. This means → the search cash machine is still running, but it shifted down a gear.
Management blamed FX headwinds and a tough comparison base: search revenue acceleration began in Q3 2025, making this quarter's year-on-year bar inherently harder. In plain terms = search isn't broken — last year was too strong, and the strong dollar hit at the same time.
Goldman also flagged sector-specific drags: some Asia-Pacific retailers cut ad spend after the EU scrapped its minimum-tax exemption; media and entertainment ad budgets normalized after the 2026 World Cup ended.
The more AI search grows, the harder it is to monetize?
Chief Business Officer Philipp Schindler acknowledged that AI-mode query volume is surging, but monetization per query is lower. Users spend three times as long in AI mode as in traditional search, yet ad efficiency lags behind.
This means → the user experience is improving, but each query generates less ad revenue — that is the "AI monetization dilemma."
Management guided for even greater FX headwinds in Q4 and continued base-effect pressure. YouTube ad revenue of $11.207 billion also missed expectations. GAAP EPS came in at $2.12, dragged down by roughly $8.7 billion in mark-to-market losses on equity holdings — well below Goldman's $2.96 estimate.
What made cloud the standout?
Google Cloud posted $30.709 billion in Q3 revenue, up roughly 103% year-on-year, beating Goldman's estimate by about 3.9%. Operating margin expanded roughly 1,250 basis points year-on-year to 36.2%.
The revenue backlog reached $561 billion, up 256%, with about 55% expected to convert to revenue within two years. This means → cloud isn't just a one-quarter story — revenue visibility stretches well into 2028.
Nearly 100 customers are now using Google's in-house AI chip, the TPU — tensor processing unit, a chip designed specifically for AI workloads — with further ramp expected in Q4 and 2027. Management cautioned, however, that compute supply constraints remain the key bottleneck capping further growth.
Can cash flow survive this level of AI spending?
Alphabet held its 2026 capex guidance at $195–205 billion. For 2027, it said only that spending would "increase materially"; Goldman estimates roughly $350.4 billion.
Goldman now projects 2026 free cash flow at negative $12.62 billion, a sharp reversal from $73.266 billion in 2025. For 2027, the estimate is roughly negative $40.567 billion. In plain terms = Alphabet used to invest while generating cash; now it is borrowing from the future to build AI infrastructure, and near-term cash flow has flipped upside down.
Management said returns on invested capital remain well above cost of capital, but acknowledged the gap between cash flow and massive investment will "persist for a period."
Goldman cut the target — so why still say "buy"?
Goldman's 12-month target dropped from $435 to $385, a roughly 11.5% cut. At the October 28 close of $324.89, the new target implies about 18.5% upside. JPMorgan cut in parallel, to $375.
Goldman uses a 50/50 blend of EV/GAAP EBIT and adjusted DCF — discounted cash flow, a method that converts future earnings into today's value. The EBIT multiple was trimmed from 26× to 24×. This reflects a more cautious near-term earnings view, but no change to the long-term pricing framework.
The team still favors Alphabet's dual positioning in consumer and enterprise AI: an app ecosystem reaching over 1 billion users plus massive compute investment. Key downside risks: search disruption, heavy-asset margin compression, tighter regulation, and macro pressure on growth-stock valuations.
What to watch next?
Two core checkpoints: can the AI search monetization dilemma be resolved + when does free cash flow turn positive again.
This means → the next earnings report isn't about cloud growth — that line is already proven. The question is whether ad revenue per search query can stop falling, and whether the enormous capex is starting to pay back.
Microsoft, which reported on the same day, rose about 3% after hours — a stark contrast to Alphabet's -10%. This reflects that what the market cannot tolerate right now is not heavy spending per se, but heavy spending without visible growth certainty in the core search business.
市场有风险，内容仅供研究参考，不构成投资建议。