According to Woofun AI, after Alphabet (GOOGL.US) released its financial report for the third quarter of fiscal year 2026 on October 28, the stock price experienced a sharp drop in after-hours trading, falling 9.79% to $293.09.
Despite continued expansion in revenue scale, free cash flow was negative for the second consecutive quarter, the gap widened further compared to the previous quarter, and an increase in future capital expenditure guidelines directly triggered deep market concerns about the return on AI infrastructure investment and financial sustainability. This drastic reaction marks a shift from the simple pursuit of growth by tech giants in the AI arms race to a serious scrutiny of capital efficiency and debt structures.
The divergence between revenue and net profit constituted a core contradiction in this quarter's earnings report. Alphabet's total revenue for the quarter reached US$127.577 billion, up 25% from US$102.346 billion in the same period last year, and achieved double-digit growth for the 13th consecutive quarter.
However, this actual revenue was still slightly below Wall Street analysts' expectations of $128.22 billion. On the operating profit side, the company achieved US$40.576 billion, an increase of 30% over the previous year, and the operating profit margin increased to 32% from 31% in the same period last year, indicating the steady profitability of its core business. However, net profit attributable to common shareholders declined significantly, falling 25% year over year to US$26.170 billion from US$34.979 billion in the same period last year.
The main driver of this contrast was sharp fluctuations in non-operating profit and loss: other profit and loss changed from earnings of $12.759 billion in the same period last year to a loss of $8.221 billion, of which changes in the fair value of equity securities caused a net loss of $8.664 billion. In terms of earnings per share, diluted earnings per share were $2.12, down from $2.87 in the same period last year; excluding the impact of equity securities losses, adjusted earnings per share were $2.67, which is still lower than Wall Street's estimate of $3.02.
This contraction on the profit side does not stem from a decline in the main business, but rather a direct erosion of book profits due to fluctuations in financial asset valuations, reflecting the pressure on the macro-financial environment to reprice the balance sheets of tech giants.
Deteriorating cash flow conditions and a surge in capital expenditure were another key factor triggering the fall in stock prices. Alphabet's free cash flow for the third quarter was negative $9.065 billion, compared to a positive $24.461 billion in the same period last year, a sharp decrease of $33.526 billion year over year, which is also lower than analysts' expectations of negative $2.7 billion.
This turnaround was mainly due to an explosive increase in capital expenditure: capital expenditure for the quarter reached $51,355 billion, up about 114% from $23.953 billion in the same period last year, but below analysts' expectations of $55.78 billion. This high investment is mainly used for the construction of AI computing power infrastructure and the accumulation of inventory required to sell TPU systems.
Although the company maintains its capital expenditure guidelines of $195 billion to $205 billion for the full year of 2026, it is clear that capital expenditure will increase significantly in 2027. As a result of this huge upfront investment, operating cash flow cannot cover investment expenses. Free cash flow has been negative for two consecutive quarters, and the gap is still widening. The market's concern about this trend is whether the company can maintain long-term shareholder returns and debt repayment capacity while cash flow continues to be under pressure as the marginal cost of AI infrastructure construction rises.
AI-driven core business highlights underpin the company's long-term strategy. CEO Sundar Pichai pointed out that investment in AI is substantially driving the growth of the search business, and the year-on-year growth rate of search queries, including commercial queries, hit a new high in the past five years. Google's cloud business performance was particularly strong, with revenue up 103% year over year, and the first-party model API processed nearly 32 billion tokens per minute, more than four times that of a year ago. In terms of consumer-grade products, Gemini App users reached 1 billion, making it the fastest growing product in Google history; YouTube Music and Premium also surpassed 150 million global subscribers. These data show that AI technology has moved from the proof-of-concept stage to large-scale application, not only monetizing through cloud services on the enterprise side, but also establishing ecological barriers through user growth on the consumer side.
However, these business highlights did not completely offset market concerns about deteriorating financial indicators, as there is still a time gap between user growth and revenue conversion, while the pressure on capital expenditure is immediate and enormous.
Changes in the balance sheet and debt structure have further revealed adjustments in the company's financing strategy. As of September 30, 2026, Alphabet's total assets reached US$1,03.312 billion, breaking the $1 trillion mark, a significant increase of 68.5% from US$595.281 billion at the end of 2025. Among them, net fixed assets reached US$372,827 billion, up from US$246.597 billion at the end of 2025, reflecting the accumulation of real assets in infrastructure investments. Marketable securities were US$208.764 billion, and the total amount of cash, cash equivalents and marketable securities was US$265.098 billion.
Meanwhile, long-term debt rose to $125.102 billion, a significant increase from $46.547 billion at the end of 2025. The rapid expansion in the size of debt is to match the increase in capital expenditure. However, the company did not shy away from equity financing during the same period: it issued senior unsecured bonds to raise $28.7 billion in net capital during the quarter, sold 12 million Class A and 24 million Class C common shares through a market price issuance plan, raised $12.4 billion in net capital, and suspended share repurchases ($11.5 billion in the same period last year).
In addition, unallocated costs at the Alphabet level reached $7.655 billion, compared to $4.467 billion in the same period last year. This portion of the expenses mainly involved AI R&D activities shared by the group, including personnel remuneration and technical infrastructure usage costs required for general AI model development. As AI research and development continues to advance, related costs at the group level are also increasing, further reducing overall profit margins.
According to data compiled by Woofun AI, the division of tech giants in AI investment strategies is beginning to show. According to Meta (META.US)'s financial report for the third quarter of 2026 released on October 21, capital expenditure was US$33.942 billion and reached US$34.906 billion when financial leasing was included; operating cash flow for the same period was US$32.786 billion, and free cash flow turned negative US$2.12 billion. The company raised the upper limit of its capital expenditure guidance for the year to US$145 billion, and the stock price fell nearly 7% after the earnings report was announced. In contrast, Oracle (ORCL.US) sent different signals on Investor Day on October 28. It is expected that capital expenditure will peak in the next few years, that external financing of more than $20 billion will not be carried out until fiscal 2030, and that free cash flow will be corrected in the second half of fiscal year 2028. The stock price rose by more than 12% after the announcement.
This difference in strategy reflects the market's different expectations for the AI infrastructure return cycle: Alphabet and Meta chose aggressive expansion to seize market share, while Oracle placed more emphasis on financial discipline and cash flow balance. The focus of the market is gradually shifting to return on investment, that is, whether continuously expanding computing power investment can bring corresponding business growth, and whether companies can maintain healthy cash flow during the expansion process.
The explosion of Google's cloud business and the contribution of sales of TPU systems are key to offsetting some of the concerns. In the third quarter, Google Cloud's revenue reached US$30.709 billion, compared to US$15.157 billion in the same period last year, a sharp increase of 103% over the previous year, which greatly exceeded analysts' general expectations of US$28.7 billion. The sector's operating profit increased sharply from US$3.59 billion in the same period last year to US$11.121 billion, and the operating margin increased to around 36.2%. Enterprise demand for AI infrastructure and solutions is the core driving force, and sales of TPU systems have also contributed significantly to revenue growth, reflecting the accelerated transformation of enterprise customers' demand for AI computing infrastructure into actual orders and revenue. The usage of model services is also growing rapidly. Google's self-developed flagship series model API processes nearly 32 billion tokens per minute, more than four times the processing volume a year ago, and an increase of about 40% over the previous quarter. Google Cloud's revenue doubled and operating profit increased dramatically, indicating that Alphabet's huge investment in the AI field has begun to be converted into considerable revenue and profit through the cloud business.
However, as subsequent infrastructure investment continues to expand, whether Google Cloud can maintain its current growth rate and whether profit growth can continue to cover higher computing power construction costs are still the focus of market attention.
The steady growth of the advertising and search business provides a basic basis for overall revenue. The Google Services segment achieved revenue of 96.302 billion US dollars in the third quarter, compared to 87.052 billion US dollars in the same period last year, and operating profit of 39.157 billion US dollars, compared to 33.527 billion US dollars in the same period last year. Among them, “Google Search and Others” revenue reached US$63.50 billion, an increase of 12% year over year, but it fell short of analysts' expectations of US$64.96 billion. Instead of weakening search, investment in AI drove year-on-year search queries to record the highest growth rate in the past five years. YouTube ad revenue reached $11.27 billion, up 9.2% year over year; Google Network ad revenue was $7.455 billion.
Other innovative business segments achieved revenue of $372 million, compared to $344 million in the same period last year; operating losses expanded to $2,047 million, or $1,426 million in the same period last year. Looking at global geographic regions, the US domestic market's third-quarter revenue reached US$67.681 billion, up from US$60.846 billion in the second quarter of 2026. Overseas markets also performed well, with Europe, the Middle East, and Africa generating revenue of US$32.695 billion, the Asia-Pacific region's revenue of US$19.06 billion, and the rest of the Americas generating revenue of US$7.10 billion. All major regions around the world have maintained steady performance, showing the resilience of core advertising businesses to risks.
The progress and internal efficiency improvements of the Gemini 4 series model show the deepening of the technical moat. Two weeks after Argon's release, demand and usage were strong. On the developer platform, usage climbed 3.5 times faster than Gemini 3 in the first week, even with capacity limitations. Argon excels in finance, law, cybersecurity, and science, and has been used by developers and cloud customers to sort out legacy codebases, accelerate scientific research, robotics, discover product improvements, and field-specific tasks that require deep reasoning. Within Google, Chrome, advertising, and search teams have used Argon to write and optimize code faster over the past few weeks, increasing code delivery by 35% and reducing errors by 30%.
As the strongest cutting-edge model, Carbon has advanced cybersecurity and long-term capabilities, ranking first with a score of 59 in the recently updated Artificial Intelligence Analysis Index. In addition to the Gemini 4 series, Genie 4, released on October 27, is the most advanced world model to date. It can simulate a safe, realistic, and interactive world in real time, and supports native audio, and is an important cornerstone for training robots and intelligent bodies. The company expects to continue to accelerate over the next 12 months due to recursive self-improvement (RSI), and this self-reinforcing ability to iterate on technology forms Alphabet's core competitive advantage in the AI field.
The analyst Q&A session revealed the complexity of financial details and future prospects. The annualized revenue operating rate has reached 500 billion US dollars. Ashkenazi pointed out that search and other advertising revenue increased 12% year over year to 63.3 billion US dollars in the third quarter. The exchange rate was the single biggest factor. Vertical sectors such as retail were affected by the EU's cancellation of minimum tax exemptions, and advertising spending for media and entertainment normalized after the World Cup. The company has begun to absorb the impact of accelerated search growth in the second half of 2025. As a result, the third quarter reduced its growth contribution by about 3 percentage points, and it is expected that it will continue to absorb about 2 percentage points in the fourth quarter.
Google Cloud's revenue increased 103% to US$30.7 billion. More than 2,600 customers have used at least 100 billion tokens, and nearly 75 have used more than 10 trillion tokens; nearly 90% of the Fortune 100 companies are using the Gemini Enterprise Edition. The TPU system sales confirmation method is to first include backlog orders after signing an agreement, then begin to backlog inventory. Cash flows out first, and cash inflows after delivery and billing to the customer. The backlog of orders reached US$561 billion, mostly typical Google Cloud platform contracts, and is expected to confirm just over 55% of the total backlog of revenue over the next 24 months.
Capital expenditure for the third quarter was $51.4 billion, with the vast majority being spent on technology infrastructure to support AI investments, of which approximately 65% were servers and network equipment, and 35% were data centers. Total revenue costs were $51.4 billion, up 24% year over year; other revenue costs were $35.1 billion, up 32%. R&D expenses increased 36%, and sales and marketing expenses increased 22%. Operating cash flow of $42.3 billion in the third quarter was $179.6 billion over the past 12 months, but was affected by the backlog of sales inventory of TPU systems and the 2018 EU fine of $5.2 billion in cash payments.
Free cash flow for the third quarter was negative $9.065 billion, mainly due to capital expenditure investments, the aforementioned inventory backlog, and penalty payments; free cash flow over the past 12 months was $19.7 billion. Waymo has completed more than 300 million miles of fully automated driving miles and now operates in 15 major US cities. It will soon open its services to the public in San Antonio, San Diego, and Tampa, with plans to expand to Canada, Germany, Singapore, and Spain. Isomorphic is using Argon to support drug design research, and Project Suncatcher is sending TPU into space.
This multi-dimensional business layout and technology investment aims to establish long-term ecological barriers, but short-term financial pressure and debt risks still need to be mitigated through continuous revenue growth and efficiency improvements.