Alphabet’s Investment Write-Down Drove the Earnings Miss, Not the Business – Goldman Sachs Says Buy
Alphabet shares cratered after a jarring earnings miss, but the actual business may tell a very different story than the headline number suggests.
Alphabet (NASDAQ: GOOGL) | GOOGL Price Prediction just ended a 12-quarter run, and investors sold hard. Shares traded at $285.31 this morning, down 12.18% in the session. Business Insider reported that the drop erased a huge amount of market value. The miss looks worse than the business, though, and Goldman Sachs (NYSE: GS) still rates the stock a Buy as a top AI pick.
An Investment Write-Down Drove the Miss
GAAP EPS came in at $2.12, missing the $2.97 consensus by 28.52%. Revenue of $127.58 billion was essentially in line with the $127.83 billion estimate and grew 24.6% year over year. An $8.7 billion loss on equity securities reduced EPS by $0.55, so much of the shortfall came from an investment mark, with operations playing a smaller role. Operating income rose 29.93% to $40.58 billion.
Investment swings distort GAAP results across the group. During the quarter, Microsoft (NASDAQ: MSFT) recorded a $207 million OpenAI gain, and Amazon (NASDAQ: AMZN) reported $ mostly Anthropic-related other income in its second quarter.
Search Growth Is the Key Question
Search and other revenue reached $63.35 billion, up 12%, which fell short of expectations. Goldman Sachs reports that management blamed currency headwinds and tougher comparisons, and described AI-driven searches as additive to the business rather than a drain on it. Chief Executive Sundar Pichai backed that up:
“Our AI investments are driving overall Search query growth, including commercial queries. In fact, our year-over-year query growth rate is the highest it’s been in the last five years.”
Cloud Is Growing Faster Than Azure and AWS
Google Cloud revenue grew 103%. Azure grew 48%, and AWS grew 37% in its most recent quarter. Pichai said:
“Google Cloud revenues grew 103%, powered by huge demand for our AI infrastructure and AI solutions. We’re also seeing strong demand for our TPU systems across a wide range of customers.”
Goldman Sachs reports that management cited a backlog of $561 billion. Goldman Sachs says that figure is up 256%, and that management expects about 55% of it to turn into revenue within 24 months. Management also said compute availability is the main thing holding back even faster growth. Sundar Pichai said “the Gemini app has reached one billion users”. Agents are the next product layer. These are Universal Cart and Gemini Agent in Search and Workspace, with plans to bring agents to Chrome and Android, all running on the Gemini 4 Argon and Carbon models.
Spending Opens a Free Cash Flow Gap
Capital spending reached $51.355 billion in the quarter, and free cash flow came in at negative $9.065 billion. Goldman Sachs reports that management repeated 2026 capex guidance of $195 billion to $205 billion and expects a further material increase in 2027. Goldman Sachs estimates about $203 billion for 2026 and about $350 billion for 2027. Someone has to power, cool, and network all that spending, and we rounded up seven of those suppliers in a free AI infrastructure report. Management expects returns to stay above its cost of capital, but the cash gap is real. Amazon faces the same pressure, with trailing free cash flow at -$7.6 billion.
Goldman Lowers Its Target but Keeps a Buy
Goldman Sachs repeated its Buy rating and cut its price target from $435 to $385. Goldman Sachs says the stock trades at about 18x its 2027 GAAP EPS estimate and 15x its 2028 estimate, both excluding net cash. Goldman’s view is that the market underrates how widely Alphabet can distribute AI through its billion-user apps, as well as its scale in compute and custom chips.
Alphabet is still a top AI name. Its cloud business is growing faster than its two biggest rivals, and the EPS miss was mostly an accounting mark, so watch Search growth and a clearer view of normalized free cash flow.
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Lee Jackson has covered Wall Street analysts' equity and debt research and equity strategy daily for 24/7 Wall St. since 2012. His broad, diverse career, including a stint as creative services director at an NBC affiliate in Austin, Texas, gives him unique insight into the financial industry.
Lee Jackson's journey in the financial industry spans more than 30 years, including nearly two decades as an institutional equity salesperson at Bear Stearns, Lehman Brothers, and Morgan Stanley. His career spanned pivotal sell-side Wall Street events, from the dot-com rise and bubble to the Long-Term Capital Management debacle, 9/11, and the Great Recession of 2008. This reflects his resilience and adaptability amid market volatility.
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