$GOOGL (-3,28%)
Weakness in Search and sharply rising AI spending overshadow the boom at Google Cloud
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The bottom line: Wall Street is cutting price targets left and right, and Citizens has downgraded the stock. Investors are questioning whether the AI trend can be monetized quickly enough to offset weaker growth in traditional search and the massive rise in infrastructure costs.
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Average price target: $399
Potential from the current price of ~$288: ~39%
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Current analyst estimates:
• Pivotal Research: Buy, $475 (unchanged) (+65%)
• Mizuho: Outperform, $460 (unchanged) (+60%)
• Canaccord: Buy, $450 (unchanged) (+56%)
• Guggenheim: Buy, $450 (unchanged) (+56%)
• Evercore ISI: Outperform, $435 (down from $450) (+51%)
• Barclays: Overweight, $405 (down from $425) (+41%)
• Susquehanna: Positive, $400 from $460 (+39%)
• KeyBanc: Overweight, $385 from $410 (+34%)
• BofA: Buy, $380 from $430 (+32%)
• Morgan Stanley: Overweight, $375 from $400 (+30%)
• Raymond James: Strong Buy, $350 from $400 (+21%)
• Bernstein: Market Perform, $325 from $385 (+13%)
• DA Davidson: Neutral, $300 from $350 (+4%)
• Citizens: Downgraded to Market Perform
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Why the stock is falling:
• Search growth slowed to around 12%, below expectations and significantly weaker than in Q2
• AI-powered search queries are growing strongly but are still monetized less effectively than traditional search queries
• YouTube ad revenue growth also slowed to about 9%
• Operating income missed expectations due to higher AI R&D and TPU costs
• Free cash flow fell to approximately minus $9 billion, while quarterly Capex reached $51.4 billion
• Management anticipates a further significant increase in investments for 2027
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What analysts continue to view positively:
• Google Cloud revenue surged 103% year-over-year to $30.7 billion
• Cloud operating income more than tripled to approximately $11.1 billion
• Cloud margin reached a record high of 36.2%
• Backlog rose to $561 billion
• TPU system sales are emerging as a significant new revenue driver
• Search query growth reached its highest level in five years
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The key debate: Google is winning in AI adoption, but monetization is lagging behind. Investors now want evidence that AI-powered search and agent-based search can achieve similar long-term profitability to traditional Google search.
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The Bull Case: Google Cloud could be significantly undervalued by the market. Mizuho believes that TPU revenue and margins could contribute much more to profits than currently factored into the consensus, thereby offsetting some of the weakness in Search.
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The Risk: Alphabet is entering the most capital-intensive phase of its history, while at the same time its most profitable core business is experiencing weaker growth. If monetizing AI search takes longer than expected, free cash flow and margins could remain under pressure well into 2027.
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Conclusion: AI demand isn’t Alphabet’s problem. The problem is monetization. Cloud revenue is skyrocketing, TPU demand is growing, and search engagement is strong. However, investors want to see this momentum translate into profits quickly enough to justify the massive AI investment cycle.
