Alphabet (GOOG) Q3 2026 earnings review
Alphabet's cloud sales double, but server costs drain its cash
Google's cloud division is carrying Alphabet while its search business slows and server bills drain cash. Total revenue grew 25%, as Google Cloud sales more than doubled to $31 billion on demand for artificial intelligence infrastructure and custom TPU chips. Chief executive Sundar Pichai said search query growth hit a five-year high, yet search revenue growth slowed to 12% and capital spending pushed free cash flow further below zero.
| Revenue | $127.6B +25% from a year ago |
|---|---|
| Google Cloud revenue | $30.7B +103% from a year ago |
| Profit per share, excluding equity swings | $2.67 +22% from a year ago by our math |
| Free cash flow | -$9.1B -$5.9B last quarter |
⚖️ Verdict: 🟢 Bullish
The story got better because Google Cloud doubled its revenue without losing any of its profit margin. Fears that renting outside servers and selling hardware would squeeze Cloud profits proved wrong, as the division's margin ticked up to 36%. One caution: excluding last year's European fine, Alphabet's overall operating margin slipped by 2 percentage points by our math, and the company sold $41 billion of stock and debt to fund its data centers.
The question now is whether five-year-high search queries are turning into paid ad clicks, and how much of Cloud's doubling came from lump-sum chip sales rather than recurring services. Either AI queries monetize at a lower rate while hardware inflates Cloud, or tough comparisons masked healthy ad demand alongside durable cloud consumption. The third-quarter filing's click metrics and backlog table will settle both.
🐂 Bull Case
Cloud Revenue Doubled and Kept Its 36% Margin
Google Cloud, the division that rents computing power and artificial intelligence software to businesses, is carrying Alphabet's growth. A key concern entering the quarter was that renting outside server capacity, integrating cybersecurity acquisition Wiz, and selling lower-margin hardware would squeeze Cloud's profit margin.
Instead, Cloud revenue more than doubled from a year ago to $30.7 billion, and its operating profit more than tripled to $11.1 billion. By our math, Cloud's operating margin rose to 36.2%, up 12.5 percentage points from a year ago and 0.6 percentage points higher than last quarter.
This matters because Cloud now brings in nearly a quarter of Alphabet's sales and more than a quarter of its operating profit. The division absorbed the new hardware and capacity costs without giving up the margin gains it won in the first half.
What to watch: Google Cloud's contracted backlog in the third-quarter filing. A figure well above last quarter's $514 billion would show that new customer commitments still outpace the $30.7 billion quarterly revenue run rate.
TPU Systems Sales and Token Demand Accelerated
Alphabet builds its own artificial intelligence chips, called Tensor Processing Units (TPUs), and its own Gemini AI models. Until this year, the internet group used TPUs inside its own data centers, and it previously indicated that most revenue from selling TPU systems directly to customers would wait until 2027.
In the third quarter, Alphabet said "TPU systems sales were also a meaningful contributor to revenue growth" inside Google Cloud. Chief executive Sundar Pichai cited "strong demand for our TPU systems across a wide range of customers" and launched two new frontier models, Gemini 4 Argon and Carbon.
- Direct AI model usage: nearly 32 billion tokens processed per minute, up from 22 billion last quarter
- Gemini consumer app: 1 billion users, up from 950 million last quarter
- YouTube Music and Premium: over 150 million subscribers, including trials
Tokens are the small units of text or data that AI models read and write, so a 45% jump in tokens per minute from last quarter shows customers are running more live workloads on Google's models.
What to watch: any breakout of TPU hardware revenue versus recurring cloud software services in the quarterly filing. Hardware sales arrive in lumps, so knowing their size will show how much of Cloud's doubling repeats every quarter.
Underlying Profit Grew 23% Beneath the Equity Loss
Alphabet holds large stakes in private and public companies, including SpaceX, and accounting rules require it to record their paper value changes in net income every quarter. Those swings have dominated headline profit all year, and a standing risk was that a reversal would pull reported earnings down.
That reversal happened in the third quarter: equity security losses took $8.7 billion off pre-tax income, or $0.55 per share after tax. Reported net income for common stockholders fell 25% from a year ago to $26.2 billion, and diluted profit per share dropped 26% to $2.12.
By our math, stripping out this quarter's $0.55 equity loss and last year's $0.68 equity gain leaves profit per share excluding one-offs at $2.67, up 22% from a year ago. Underlying net income rose 23%, matching operating profit growth.
What to watch: the non-marketable securities footnote in the quarterly filing, which reached $135.2 billion on the balance sheet. It will show whether the third-quarter write-down came from public holdings or the private companies that drove first-half gains.
🐻 Bear Case
Search Revenue Growth Slowed Despite Five-Year-High Queries
"Our AI investments are driving overall Search query growth, including commercial queries," chief executive Sundar Pichai said. Alphabet added that its third-quarter Search query growth rate was "the highest it has been in the last five years." The core debate is whether AI answers keep users searching or replace the ad links that earn money.
The revenue table moved the opposite way from queries. Google Search and other revenue grew 12.0% from a year ago to $63.4 billion, slowing from 16.8% in the second quarter and 19.1% in the first quarter. YouTube ad growth also slowed to 9.2%, and Google Network ad revenue rose 1.4%.
Part of the slowdown is a harder comparison, because Search accelerated a year ago and the second quarter had World Cup ad spending. Still, five-year-high query growth producing the slowest Search revenue growth in a year means Alphabet earned less revenue growth per query.
What to watch: paid clicks and cost-per-click growth in the quarterly filing. If paid click growth slowed while total queries hit a five-year high, users are reading AI answers without clicking on ads.
Server Spending Pushed Free Cash Flow Deeper Negative
Alphabet is building data centers and buying servers at an unprecedented pace to meet AI demand. That buildout is both the engine of Cloud's growth and the biggest risk to cash returns, because capital spending has overtaken the cash the business generates.
Purchases of property and equipment more than doubled from a year ago to $51.4 billion, or 40.3% of revenue, while operating cash flow fell 13% to $42.3 billion. As a result, free cash flow sank to negative $9.1 billion, worse than the negative $5.9 billion in the second quarter.
- Third-quarter capital spending: $51.4 billion, up from $44.9 billion last quarter
- Senior notes issued: $28.7 billion in net proceeds "for general corporate purposes"
- Common stock sold: 36 million shares for $12.4 billion under its at-the-market program
- Share buybacks: $0 for a third straight quarter, versus $11.5 billion a year ago
Because operations no longer cover the server bill, Alphabet raised $41.1 billion in fresh debt and equity during the quarter to fund the buildout and add to its cash pile.
What to watch: fourth-quarter capital spending against the $63.0 billion to $73.0 billion implied by the prior full-year plan. Another step-up will keep quarterly free cash flow negative into year-end.
Operating Margin Slipped Without Last Year's Fine
Alphabet reported a consolidated operating margin of 31.8%, up 1.3 percentage points from 30.5% a year ago. However, the third quarter of 2025 included a $3.5 billion European Commission antitrust fine inside general and administrative expenses (legal and overhead costs).
By our math, excluding that one-time fine from last year's base, Alphabet's underlying operating margin fell 2.1 percentage points from 33.9% a year ago, and Google Services' margin slipped 1.8 percentage points. Research and development rose 1.4 percentage points of revenue to 16.2%, while unallocated corporate costs—mostly "expenses related to our shared AI research and development"—jumped 71% to $7.7 billion.
At the same time, depreciation of property and equipment rose 49% from a year ago to $8.4 billion as new data centers entered service. Cloud's profit boom is being offset at the group level by rising AI research and depreciation costs.
What to watch: fourth-quarter depreciation expense and unallocated AI research costs. A faster rise as the $51.4 billion of third-quarter equipment enters service would push group operating margins down further.
Risks this quarter didn't answer
Four standing concerns depend on disclosures that live in the quarterly filing or conference call rather than the earnings release.
- Cloud backlog and customer concentration: not in the release; the filing's revenue note will show whether backlog grew from $514 billion.
- Wiz acquisition and TPU mix: the release gives no organic Cloud growth rate stripping out Wiz or hardware sales.
- Credit backstops for data-center partners: stood at $43.8 billion last quarter; the filing's commitments note will update the off-balance-sheet exposure.
- Antitrust remedies and legal accruals: no update in the release on US search and ad-tech cases.
💲 Other KPIs
US sales jumped 38.8% from a year ago and 11.2% from last quarter, accelerating from 32.1% year-over-year growth in the second quarter. The US now accounts for 53% of Alphabet's revenue and carried the quarter's expansion, while Europe, the Middle East and Africa (EMEA) grew 9% and Asia-Pacific grew 12%.
Inventory on the balance sheet rose to $13.3 billion, up from $10.0 billion in June and more than five times the $2.4 billion held at the end of 2025. The build absorbed $3.2 billion of operating cash in the third quarter alone and $11.0 billion year to date, reflecting hardware and TPU system stock.
Long-term debt has nearly tripled from $46.5 billion at the end of 2025 after another $28.7 billion note offering in the third quarter, pushing quarterly interest expense to $967 million from $143 million a year ago. Diluted share count rose 1.4% from a year ago to 12,368 million after new stock sales.
🔮 Guidance
Unchanged. The board declared a $0.22 quarterly dividend per Class A, B, and C share, payable in December, and $15.63 per mandatory convertible preferred share, payable in November. Alphabet did not provide revenue or capital spending ranges in the earnings release; by our math, its prior $195–205 billion full-year capital spending plan implies $63.0–73.0 billion for the fourth quarter.
❓ Key Questions
Why did Search revenue slow while queries hit a high?
Search query growth reached a five-year high, yet Search revenue growth slowed from 16.8% to 12.0%. How much of that gap came from tough comparisons versus lower ad clicks on AI answers?
How much of Cloud's doubling came from TPU hardware?
Alphabet said TPU systems sales were a meaningful contributor to Cloud's 103% growth, and inventory jumped to $13.3 billion. What was Cloud's growth rate excluding one-time hardware sales and the Wiz acquisition?
Where did Google Cloud's backlog land in Q3?
Cloud backlog stood at $514 billion in June. Did new commitments outpace the $30.7 billion of revenue recognized this quarter, and how much of the backlog sits with the top five AI customers?
Did Alphabet update its full-year capital spending plan?
Year-to-date capital spending is $132.0 billion after a $51.4 billion third quarter. Does the prior $195–205 billion full-year plan still hold, which by our math requires $63–73 billion in the fourth quarter?