We’re Trimming Our Alphabet Price Target and Asking This Big Question
After last night’s earnings and cloud details, we must ask if GOOGL shares will be higher one year from now or not….
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We are seeing a wave of price target cuts for Alphabet (GOOGL) shares following the company’s third-quarter results last night. We too will join that group. We’re trimming our price target for the “Two” rated stock to $380 from $410. But as the market takes in those price target cuts and questions over how Google will fund its 2027 step-up in capital expenditures, our interest will be in when the time is right to add more GOOGL shares to the Portfolio.
Why? The reasons include Google’s growing position in cloud and the growing influence of that segment for the company’s overall revenue and profit stream as its profit picture brightens. Also, the notion that AI will eat into its search revenue is likely overdone as Google focuses on bringing multi-turn ads to the U.S. and expanding ads in international markets for Google AI Mode, much the way OpenAI is. Between the two, we would argue Google is far better positioned for that than OpenAI. And while the focus is on free cash flow given rising capital spending plans and cloud commitments, Google generated $42.3 billion in operating cash flow. Given Oracle’s (ORCL) comments about the eventual return to free-cash flow as its capital spending level peaks in 2028, we have to think Google will also return to free cash flow in a big way. The same goes for Microsoft (MSFT) when it eventually ramps down its capex levels in the coming years.
The wind up is we are seeing a post earnings reaction similar to the one we saw with Meta’s (META) third-quarter 2026 earnings report. As we know, Meta came out and quickly addressed its capital funding needs and has a plan in place to address future capital needs in a staged way. While Meta will likely be opportunistic when tapping that program, odds are it will be an overhang on the shares until it is fully used.
If Google comes out with a plan to raise capital it may push its shares a bit lower. We’d prefer it tapping its investments in SpaceX (SPCX) or eventually Anthropic to fund its buildout, but the bottom line is Google, like Meta, will need to get over this funding hump so it can deliver Google Cloud’s more than $560 billion in backlog. For a frame of reference that equates to just over 50 quarters of the revenue Google Cloud posted in Q3 2026.
Shares of Google are going to fall below our $305 check point at the market open, and land into an oversold condition. The question we’re going to think about is whether GOOGL shares will be higher 12 months from now? 24 months from now?
The answer to that is yes and that means letting the shares absorb near-term pain and waiting for a buying opportunity. We recognize this may not be appealing to some that follow the Portfolio, but then again, our focus is on where the stock is likely to be in the coming quarters, not today or a few days from now.
Google’s Q3 2026
We won’t sugar coat Google’s quarterly results as they disappointed consensus expectations on several fronts. That included missing top- and bottom-line expectations and as we mentioned earlier, another quarter of even greater negative free cash flow vs. expectations for something closer to break even. Also weighing on the company’s bottom line was an $8.2 billion other-expense loss, which was mainly an unrealized loss on the company’s SpaceX stake compared to the gains we talked about that positive impacted Google’s Q2 2026 results.
What the revenue miss and fall in free cash flow overshadow is the 30% year-over-year increase in Google’s operating income and the continued year over year improvement in operating margins. Those gains were driven by margin improvement at Google Services despite the modest revenue miss and the tripling in Google Cloud operating income compared to the year over year doubling in revenue posted for Q3 2026. This tells us that Google focus on cost containment, internal leveraging of AI and ability to monetize cloud capacity as it is brought on and bring on new capacity in a disciplined way is paying off. Internally, management shared teams using Argon are shipping 35% more code with 30% fewer errors.
One could argue that Google is paying the penalty for being successful with its cloud business after having built its backlog for that business to more than $560 billion, which the company expects to recognize ~$310 billion (55%) over the next 24 months. Anthropic’s S-1 filing this week also showed a commitment of about $114.5 billion to Google for computing power through mid-2033.
What’s behind that and Google Cloud’s tight capacity is that demand continues to outstrip supply.
Management shared that Google’s first-party model APIs now process nearly 32 billion tokens a minute, up 40% from the June quarter and more than 4x from a year ago. The Gemini app has reached 1 billion users. Nearly 90% of the Fortune 100 use Gemini Enterprise, more than 100 million knowledge-work seats have been sold, and customers that used Gemini Enterprise a year ago have more than quadrupled their spend. Gemini helped advertisers generate more than 1.5 billion campaign assets in the quarter, up more than 7 times.
The thing is, that level of demand and tight cloud capacity at Google meant the company had to turn to third-party compute capacity at the end of the September quarter to work around its own capacity limits. That is expected to continue near-term as Google Cloud continues to add capacity, which means a headwind for further margin improvement in the near term.
More on that free cash flow figure
Let’s get back to that $9.1 billion negative free cash flow figure for the reported quarter. Part of that came from a $5.2 billion payment for the 2018 European Commission fine and the inventory build for Tensor Processing Unit (TPU) systems, which Google buys only against signed contracts. The latter should turn into cash as systems are delivered and billed in 2027. Simple math tells us that excluding the EC fine, free cash flow would have been roughly negative $3.9 billion, still well short of the breakeven Wall Street expected, but better than the Q2 2026 figure.
Capital spending rose to $51.4 billion from $44.9 billion in the June quarter. The 2026 forecast of $195 billion to $205 billion is unchanged, but management expects capex to increase “significantly” in 2027 and has yet to put a number on what that spending might look like. We’ll get those details on the next quarter’s earnings call.
That expected step up in capex over the coming quarters will raise funding questions even against the $265.1 billion in cash and marketable securities and $125.1 billion in long-term debt Google had at the end of the September quarter. Odds are the cloud backlog will be used to support any further capital raise, but let’s also remember Alphabet has other irons in the fire it can monetize to fund the build-out, namely its stakes in SpaceX and Anthropic, where it owns more than 5%. And as you have likely guessed, we’re not expecting anything dramatic on the share repurchase front given the commitments ahead of the company.
More on TPUs and demand strength
Tensor Processing Units got a lot of airtime on the earning call, and for good reason given that TPU system sales were a meaningful contributor to Cloud’s 103% growth. Per management nearly 100 customers now use Google TPUs, and demand is “strong and accelerating.” Very positive for our positions in both Marvell (MRVL) and Broadcom (AVGO).
Beyond Anthropic, which buys both directly and via Broadcom, the customer list includes Apple (AAPL), which is scaling pre-training of its foundation models on the latest TPUs, frontier model companies Meridian and Physical Intelligence, and capital markets firms Citadel Securities and Jump Trading. TPU systems are now going into customers’ own data centers and to other providers, including Oracle (ORCL) and the Crux joint venture with Blackstone (BX). TPU sales are expected to scale in the December quarter and ramp meaningfully in 2027. Anthropic alone per its S-1 plans to spend $125 billion to $150 billion on TPUs from Google and other suppliers for delivery between 2028 and 2031. Odds are we’ll be hearing more about that on tonight’s earnings call from Amazon (AMZN) when it discusses its custom silicon outlook.
At the time of publication, TheStreet Pro was long AAPL, AMZN, AVGO, GOOGL, META, MRVL, and MSFT.
