Alphabet’s Price-to-Fundamentals Mismatch Just Got Better as Institutions Sour on Capex
Institutions bailed on Alphabet after a capex report that looked like a cash bonfire, but one metric buried in the quarterly filing tells a completely different story about where this spending actually lands.
Alphabet (NASDAQ:GOOGL | GOOGL Price Prediction) delivered a Q3 2026 earnings report that focused the debate over its spending. Alphabet spent $51.36B on capex in the quarter. It also held its 2026 spending plan steady and flagged a bigger 2027, and institutions soured on the plan after the report. Institutions saw cash burn. I saw a full-stack AI franchise trading at 14 times earnings.
Why Alphabet Controls the Full AI Stack
Alphabet has every layer of the AI stack: the chips, the models, the cloud, and the consumer products people already use. No one else I own controls that much of the chain. The CEO put it simply: “We’re also seeing strong demand for our TPU systems across a wide range of customers.” The company builds the hardware, sells it, and runs Gemini on top of it.
Three Receipts Behind My Conviction
Cloud has turned into a profit engine. Google Cloud revenue reached $30.71B, up 103% YoY, and segment operating income came in at $11.12B vs $3.59B a year earlier. Back in Q1, the cloud backlog stood at over $460B, though that figure is now dated.
AI is making search stronger. Total revenue hit $127.58B, up 24.6% YoY, which makes it the 13th consecutive quarter of double-digit revenue growth. Search & other grew 12%, and management said “our year-over-year query growth rate is the highest it’s been in the last five years.”
Underneath the EPS miss, the business grew. GAAP EPS of $2.12 missed the $2.97 consensus. An $8.70B loss on equity securities accounted for $0.55 of diluted EPS. Operating income rose 29.93% YoY to $40.58B. Return on invested capital stands at 29.60%, leverage at 0.143, and interest coverage at 175.5x.
How Alphabet Stacks Up Against Microsoft, Meta, and Amazon
Microsoft (NASDAQ:MSFT) is a strong cloud competitor, and Azure grew 48%. Still, it trades at 29 times earnings, and its ROIC is 22.0%. For comparison, Meta Platforms (NASDAQ:META) trades at 22 times earnings, and its Q3 operating margin fell to 20%, compared with 40% a year ago. Meta has no cloud business to sell its compute through. Meanwhile, Amazon (NASDAQ:AMZN) trades at 35 times earnings, and its trailing free cash flow had already turned negative at -$7.6 billion by Q2.
What Could Hurt This Position
Free cash flow came in at -$9.07B for the quarter, and capex rose 114.4% YoY. To fund the build-out, Alphabet issued $28.7B in senior notes and sold 12M Class A shares for $4.3B and 24M Class C shares for $8.1B through its ATM program, which still has $27.6B available. That issuance dilutes my interest. Institutions have started to move, too: among 28 tracked filers as of June 30, 8 trimmed and 3 exited, and Tiger Global cut its position. The capex jump is the same AI infrastructure story playing out across hyperscalers (we highlighted seven suppliers supporting that expansion, from power to cooling, in a free report).
The thesis remains intact. Operating cash flow reached $42.29B in the quarter, and cloud profits are rising faster than the spending that feeds them. Berkshire Hathaway (NYSE:BRK-B) also held 78,791,167 shares and added to its interest. I plan to track the pace of ATM issuance every quarter.
What Investors Should Watch Next
Alphabet raised its dividend 5% to $0.22 this year, and the stock has returned 700.43% over ten years. Investors should watch whether cloud profits continue to outpace the spending that feeds them.
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Alex Sirois is a financial writer with experience spanning both retail and institutional investing. He has written for InvestorPlace and held roles at BNY Mellon and Bernstein, giving him a perspective that bridges Main Street portfolios and Wall Street analysis.
Alex holds an MBA from George Washington University and has built his career across multiple industries, including e-commerce, education, and translation — a breadth of experience that informs how he breaks down complex financial topics for everyday investors. His writing is conversational, actionable, and grounded in long-term, buy-and-hold investing principles.
At 247 Wall St., Alex focuses on delivering analysis that is both accessible and useful, with a clear emphasis on helping readers make more informed decisions with their money.
