Alphabet Is Losing on Wall Street and Winning Everywhere Else

Recommendation

I'm bullish on Alphabet over the medium term. Although there is no clear short-term buy signal, the current price may still offer a reasonable entry point, as the stock is in a downtrend and trading near its 250-day moving average.

I chose Alphabet (Google) for the following reasons:

1. There is some evidence showing that AI will not disrupt Google's advertising business as much as we thought, which is one of Google's largest sources of revenue.
2. Cloud business grew surprisingly fast in Q2. Strong demand for Google's custom TPU chips and the expansion of external TPU system sales provide another growth opportunity for its cloud business.
3. The Gemini 4 Argon model shows that Google's AI is still among the best in the world.
4. Court decisions removed the ad-tech breakup risk and dismissed two publisher lawsuits over AI search.

Company background

Google was founded in 1998. It started with its search engine, then expanded into online video with YouTube and developed its advertising business. Today advertising is its main source of revenue, and its cloud business is growing fast. Google also generates subscription revenue from services such as YouTube Premium and Google One, which offers cloud storage and AI features. In 2015, Alphabet was created as Google's parent company to help Google focus on its core business while allowing other ventures to operate more independently. Alphabet invests heavily in high-tech areas such as biotech, self-driving cars, drone delivery and robotics.

Google's customers fall into three groups:

1. Advertisers. They pay for 68% of Alphabet's revenue. Millions of businesses buy search ads through Google Ads, video ads on YouTube, and ads on third-party websites and apps through AdSense and AdMob.
2. Enterprises and AI labs. They buy computing power, models and data tools from Google Cloud, which is 21% of revenue. The largest customer today is Anthropic. It signed for about one million TPUs in October 2025, expanded to 3.5 gigawatts with Google and Broadcom in April 2026, and its reported five-year commitment of about $200bn is more than 40% of Cloud's backlog. The Wall Street Journal also names Apple and Meta as large customers, and OpenAI has reportedly bought capacity since 2025. Traditional enterprise examples are PepsiCo and HSBC.
3. Consumers. They pay for the remaining 11% through YouTube Premium and YouTube TV subscriptions, Google One storage and AI plans, and Pixel phones. App developers also pay Google Play a share of their sales.

Revenue mix, Q2 2026. Of $119.8bn in total revenue, advertising is 68.1% (search and other ads 52.8%, YouTube ads 9.2%, network ads 6.1%), Google Cloud is 20.7%, subscriptions, platforms and devices are 10.8%, and Other Bets and other are 0.4%. Source: Alphabet Q2 2026 earnings release and Form 10-Q.

Thesis

Cloud revenue growth, year on year. Calendar quarters from Q1 2025 to Q2 2026, in order. Google Cloud grew fastest in every quarter and accelerated the most.

• Google Cloud 28%, 32%, 34%, 48%, 63%, 82%
• AWS 17%, 17%, 20%, 24%, 28%, 37%
• Microsoft Azure 33%, 39%, 40%, 38%*, 39%*, 43%

Google Cloud and AWS: reported growth in US dollars. Azure: Microsoft's "Azure and other cloud services" line; * marks constant-currency figures. Microsoft quarters are mapped to calendar quarters (its fiscal Q4 is April to June). Sources: company earnings releases and 8-K filings, checked 2 October 2026.

1. We need to figure out why Google is in a downtrend right now: the increase in capex is the main reason. AI is driving more usage, but Google still needs more computing capacity. It raised 2026 capital-spending guidance to $195-205bn and expects another significant increase in 2027. Q2 alone was negative $5.9bn. But Alphabet identifies advertising as its largest source of operating cash. That helps fund AI capacity while Cloud expands.
2. On 2 September 2026, the court rejected a forced sale of the AdX advertising exchange, reducing the risk of a disruptive separation. Almost 68% of its revenue comes from advertising, yet the market showed almost no reaction when the court decisions came out, which is unusual. Google Cloud revenue also grew 81.8% year on year, significantly outpacing its major peers.
3. Users are still choosing Google. In Evercore ISI's August survey, 78% named Google as their main search engine, up from a low of 70% in 2024 and early 2025. ChatGPT was at 10%, below its 13% peak a year earlier. More searching could mean more ad opportunities. 60% said they searched more after adopting AI, versus 8% who searched less. Google also remained the first stop for purchases such as flights, hotels and local services. That supports my view that AI can help Search grow, though extra usage still needs to earn enough to cover the computing cost.
4. Cloud gives Google another way to earn from AI: businesses pay for computing, models, data tools and security. Selling TPU systems adds another source of revenue. Management expects most revenue from its existing system-sale agreements to come through in 2027.
5. Gemini is gaining ground in the Evercore ISI survey. In a separate measure of AI-service preferences, its gap behind ChatGPT narrowed to 3 percentage points, from 11 in August 2024. New update: Gemini 4 Argon, released on 30 September, comes nearly a year after Gemini 3 and after months of worry about delays to Gemini 3.5 Pro. Google says it sets new highs on several coding and knowledge-work benchmarks and is already in use inside the company.

Catalysts

1. After the ad-tech ruling. A smooth transition to the new rules could build confidence that Google can keep generating advertising cash while expanding AI. The ruling has already happened; how the changes affect the business is still ahead.
2. Continued Search growth and stronger Cloud profit would support the case.
3. TPU orders becoming revenue in 2027. Google has signed contracts to sell TPU systems. It first builds inventory, then generally recognizes revenue when it delivers the systems. Management expects most revenue from the existing agreements in 2027. On-time delivery would support Cloud growth.
4. Gemini models and paid upgrades. A stronger next model and adoption of the Gemini Spark assistant are potential catalysts.
5. Other Bets. Their revenue might increase.

Valuation

• Current share price: $343.50
• Expected EPS: $15.15 per share (FactSet)
• Forward P/E = $343.50 / $15.15 = 22.7

Risk

1. Advertising could become less profitable. Other AI assistants may take users away, ads may work less well, or AI answers may cost more to deliver.
2. Regulatory costs remain. The ad-tech remedies require more access for rival tools, data sharing and limits on favoring Google's own products, with six years of oversight.
3. Safety gates may slow the product. Google confirmed on 18 September that Gemini hacked three real companies during a May cybersecurity test, which is why Argon is limited to trusted security vendors for now.