Google As We Know It Is Changing

When Alphabet (GOOGL) released its Q3 earnings last month, two figures stood out.

Search advertising, the tech behemoth's largest revenue source, grew by 12%.

That was down from 17% in the second quarter and below the approximately 14% growth analysts had pencilled in.

The figure suggested that the business Google is synonymous with might be losing momentum.

For the first time, Google Search also accounted for less than half of Alphabet's total revenue.

The other side of the results told a very different story.

Google Cloud sales more than doubled to $31 billion, lifting the segment's contribution to the company's top line to 24%, up from 15% a year earlier.

Demand for its tensor processing units (TPUs), Alphabet's answer to Nvidia (NVDA)'s GPUs, was reported as strong.

The company also said its Gemini 4 Argon and Carbon models were leading at the frontier.

"Overall, our first-party model APIs are now processing nearly 32 billion tokens per minute, more than four times what we processed a year ago," it said.

The Gemini app also reached one billion users, making it the fastest-growing product in Google's history.

Alphabet said foreign exchange was the biggest factor behind the slowdown in Search growth compared with the second quarter.

However, company executives conceded that AI-powered Search had also played a significant role.

"The strong growth in AI Overviews had an impact because of the lower monetization we were seeing in AI Mode," said Philipp Schindler, Alphabet's chief business officer.

The company acknowledged that queries conducted through AI Mode were, on average, three times longer than traditional searches, but generated lower monetisation for the time being.

While the contrasting numbers for Search and Cloud may have left investors confused, another metric helped complete the picture.

Alphabet reported negative free cash flow of $9.07 billion, substantially worse than the $2.70 billion analysts had expected.

The company also maintained its FY 2026 capital expenditure guidance of $195 billion to $205 billion and expects spending to increase substantially in FY 2027, although management has not provided a numerical range.

Alphabet's stock tanked roughly 13% in its worst single-day drop in company history, wiping out approximately $475 billion to $511 billion in market capitalisation.

For investors, the narrative was set: Alphabet was burning cash to support a technology that was generating rich returns but was also beginning to cannibalise its core Search business, its main cash cow.

“This is the first quarter that the negative thesis around AI crushing search has legs,” Dan Ives, a famously bullish analyst at Yorkville Ives, wrote in an Oct. 30 note.

The company plans to scale advertising within its AI Overviews and AI Mode products going forward.

But the question remains: will Alphabet gradually become known less for Google Search and more as a cloud infrastructure company?

How GenAI turned around Google Cloud's fortunes

When Sundar Pichai replaced Google co-founder Larry Page as CEO in 2019, he identified Google Cloud and YouTube as two major bets that could take Alphabet beyond its dependence on Search advertising.

Since then, YouTube has largely delivered, becoming the world's largest video platform.

Google Cloud, by contrast, struggled for years, losing billions between 2018 and 2022 as Alphabet invested heavily in servers, data centres and chips.

The business finally turned its first profit in 2023.

Generative AI now offers Alphabet an opportunity to accelerate that progress and close the gap with cloud rivals Microsoft (MSFT) and Amazon.

Amazon (AMZN) remains the global market leader, with an approximately 31% share, while Microsoft's Azure holds about 20%.

"This quarter makes a real case that Alphabet can start taking the AI lead from Microsoft (when it comes to cloud)," David Wagner, head of equities at Aptus Capital Advisors, told Invezz.

"Query growth was the strongest in five years, so people are using Search more than ever. Alphabet just isn’t getting paid as much for each query yet, which is exactly the cannibalization investors fear. Ads are now scaling across AI Overviews and AI Mode, including internationally for the first time, and that rollout is the thing to watch," he said.

Google Cloud to soon rival combined strength of Search and YouTube

Wagner, however, conceded that it would not be unreasonable to expect Google Cloud to become Alphabet's primary driver of incremental earnings growth, even as Search remains its largest revenue contributor.

"It’s already happening: Cloud is doing most of the heavy lifting on growth now, and it’s adding more new profit than the entire Search and YouTube side combined, but this was inevitable. Search is still the big cash cow, but Cloud is where the incremental earnings story lives," he said.

He is not alone.

Rosenblatt expects Google Cloud revenue to surpass the combined revenue of Search and YouTube by 2028.

The brokerage believes Alphabet's value is gradually shifting from advertising towards cloud computing, although investors will need time to assess near-term trends and the durability of its Search business.

JPMorgan's Doug Anmuth, meanwhile, believes Google Cloud will become an even more critical part of the business, driving overall Alphabet revenue growth of approximately 30% in both 2027 and 2028.

"AI’s main beneficiary, without a doubt, is Alphabet’s cloud business," said Malik Ahmed Khan of Morningstar, adding that not only is the segment's growth stellar, but its backlog, or future contracted revenue, is also five times its annualised quarterly sales.

This provides the business with significant visibility as it invests in AI infrastructure.

"Within cloud, we see TPUs, Alphabet’s AI accelerators, as a key differentiator. As Alphabet moves from renting out TPUs to actually selling them to external customers, including Anthropic, and recently Oracle (ORCL), we expect Google Cloud revenue to meaningfully inflect upward," he said.

Should Alphabet split its Cloud and Search businesses?

As investors' reaction to Alphabet's earnings overshadowed the strong Cloud growth, Gil Luria of DA Davidson suggested that the company should split up its Cloud and Search businesses.

"As the stock now trades at 18-19x earnings, you have to ask yourself why do you want to penalise this very fast growing AI business because it's attached to a search business that is now going to be in perpetual slowdown," Luria told CNBC.

Wagner disagrees with the suggestion.

"I don’t buy it, because the whole point is that these businesses feed each other: the same chips, models and research power both Search and Cloud, and Search’s cash flow is what pays for the massive AI build-out. Splitting them would be like separating the engine from the gas tank," he said.

Alphabet must prove AI can monetise Search as Cloud takes centre stage

That interdependence could become increasingly important as Alphabet expands its AI infrastructure.

Cloud and AI solutions may account for a growing share of incremental revenue and earnings, but Search's cash generation will remain crucial to financing that expansion.

Khan said he believed investors were underappreciating the breadth and depth of Alphabet’s AI monetization and the rapid upcoming growth in Google Cloud.

He added that Alphabet’s vertical integration allows it to absorb AI costs better than peers.

"Its in-house TPUs, AI models, and co-design of hardware and software enable it to lower its total cost of ownership. As such, we view the cost-led bear argument against Alphabet to be manageable," he said.

The company's stock remains in the red, down about 9% this year.

Over the past week, analysts have lowered their estimates for Alphabet’s 2026 earnings per share by 4.5%, even if it has made the stock cheaper too.

"Cloud is carrying the story, but until Search shows AI is additive, the stock may be in the penalty box," Wagner said.

The immediate challenge for Alphabet therefore is to prove that AI-powered Search can generate enough advertising revenue to offset changes in how users discover information and shop online.

According to Futurum Research, Alphabet's AI strategy is creating distinct monetisation opportunities across enterprise applications, infrastructure and consumer Search, but each business faces a different execution challenge.

Gemini Enterprise adoption and external TPU distribution could broaden revenue sources beyond traditional cloud consumption, although the profitability of externally deployed hardware remains less transparent.

Meanwhile, longer conversational queries and growing AI Mode engagement have yet to demonstrate advertising economics comparable to traditional Search.

Improving monetisation will therefore be essential to protecting the profitability of Google's core business.

"If enterprise AI spending and TPU deployments generate sufficient returns to absorb rising infrastructure costs while AI Search improves advertising yields, Alphabet could sustain a broader AI growth profile without sacrificing the margins that underpin its investment capacity," it said.

Alphabet's business identity is changing

For now, the outlook for Search continues to divide analysts.

The bears, according to Morningstar, believe the deceleration will remain gradual, giving Alphabet time to adapt its business and "drive the majority of sales from nonsearch businesses within five years".

The bulls and bears may disagree on how quickly Search will lose ground, but they appear to converge on one point: Alphabet's business identity is changing.

"Cloud’s still about half the size of Search, but at the pace it’s growing and with the backlog it’s sitting on, I think they’re neck and neck within a couple of years. So yes, the value is moving, and Alphabet is slowly turning from an ad company with a cloud business into an AI infrastructure company that happens to own the best ad business in the world," Wagner said.