Is the death of Google Search imminent?

Search revenue growth has slowed from 19% to 12% in just two quarters, fueling fears that AI is cannibalizing Google's most profitable business.

In fact, management even acknowledged it during the earnings call:

The market's reaction?

More than $500B wiped from Alphabet's market value in just two trading days.

But here's what's getting lost in all the fear.

AI Mode wasn't even the biggest reason Search growth slowed.

Meanwhile, management reported its fastest YoY Search query growth in five years.

So, is this the beginning of Google's decline, or is the market overlooking something important?

Let's break down what actually happened this quarter and whether this selloff has convinced me to start buying.

Disclaimer: This is not financial or investment advice. I'm sharing my personal investment decisions and reasoning for educational and informational purposes. Always do your own research before making any investment decisions.

Alphabet is the parent company of Google, which operates some of the world’s largest technology platforms, including Search, YouTube, Android, and Google Cloud. The company generates most of its revenue through advertising, alongside cloud computing, subscriptions, and other services. The third quarter delivered another period of strong growth, led by a sharp acceleration in Google Cloud as demand for AI infrastructure and services continued to strengthen.

Quarter at a Glance

What Mattered

1/ Search Paradox

Google Search & Other revenue increased 12% to $63.4B, down from 17% growth in the previous quarter, even as management reported the fastest YoY Search query growth in five years. Google's AI features are driving increased usage, with queries becoming longer, more complex, and increasingly multimodal. Queries in AI Mode are now 3x longer than traditional searches on average, which management sees as an opportunity for more relevant advertising.

During the earnings call, management offered several explanations for the slowdown. CFO Anat Ashkenazi highlighted tougher YoY comparisons, while Philipp Schindler, Google's Chief Business Officer, identified FX as the largest contributor to the sequential deceleration, alongside weaker spending from certain APAC retail advertisers and normalized advertising demand following the World Cup. Schindler also acknowledged that growing AI Mode usage contributed to the deceleration because these queries currently monetize at lower rates.

Google is responding by expanding advertising across AI Overviews and AI Mode, including international markets and new multi-turn ad formats in the U.S. Management said the majority of AI Mode queries are incremental and highlighted early experiments showing similar click-through rates between sponsored and organic product listings. However, those results do not establish comparable monetization between AI Mode and traditional Search, and management did not quantify the current gap.

Looking ahead, Google is also developing agentic commerce experiences that could create additional advertising opportunities as users increasingly rely on AI to research products and complete transactions. Management views these experiences as additive to Search, although their eventual monetization remains uncertain.

2/ Cloud Acceleration

Google Cloud revenue surged 103% YoY to $30.7B, with operating income more than tripling to $11.1B and operating margin expanding from 23.7% to 36.2%. Growth was driven primarily by Google Cloud Platform (GCP), including AI infrastructure, AI solutions, and core cloud services. TPU system sales also became a meaningful contributor, although management emphasized that Cloud growth remained strong even excluding TPU system sales.

Google is expanding beyond offering TPUs within its own cloud to selling complete systems for deployment in customer data centers and through partners such as Oracle and Crux AI. Google Cloud CEO Thomas Kurian explained that this broadens Google's addressable market, particularly among customers with on-premises infrastructure requirements. Sundar Pichai also emphasized how greater TPU production volumes across internal and external customers could improve economies of scale.

During Q&A, analysts repeatedly pressed management on TPU revenue contributions and profitability. Management declined to disclose product-level financials but emphasized that these systems combine hardware, networking, storage, and software rather than simply selling chips. Kurian also confirmed that TPU inventory is procured against signed customer contracts, while CFO Anat Ashkenazi expects system sales to continue scaling in Q4 before a meaningful revenue ramp in 2027.

That revenue visibility extends beyond TPU system sales. Cloud's backlog reached $561B, up from $514B in Q2, with management expecting to recognize just over 55% as revenue over the next 24 months. Management said most of the backlog relates to typical GCP contracts. Despite the strong demand, management expects near-term Cloud margin pressure as Google increases its use of third-party compute capacity, which came online only near the end of Q3.

3/ The Cost of AI Keeps Growing

Alphabet's capital expenditures surged 114% YoY to $51.4B, exceeding operating cash flow of $42.3B and resulting in a second consecutive quarter of negative free cash flow at ($9.1B). Cash generation was also affected by inventory buildup for TPU system sales and a $5.2B European Commission fine payment. Management maintained its FY2026 CapEx guidance of $195B–$205B and expects spending to increase significantly again in 2027.

The scale of Alphabet's future obligations continues to increase. Purchase commitments reached $924B, up from $811B in Q2, with $213B due within the next 12 months. The company also disclosed $130.5B in future payments for leases not yet commenced, primarily related to data centers and energy infrastructure. Most of these obligations extend over multiple years, and certain purchase contracts allow pricing or volume flexibility. They do not represent immediate cash outflows.

Alphabet also raised significant external capital, issuing $28.7B in debt and $12.4B in common equity during Q3, while making no share repurchases. The company ended the quarter with $265.1B in cash and marketable securities against $125.1B in long-term debt.

Management emphasized that its infrastructure investments support revenue opportunities across Search, Cloud, and subscriptions, and expects returns on invested capital to remain meaningfully above its cost of capital. However, it did not provide a quantified return forecast or timeline for free cash flow recovery. Higher depreciation and data center operating costs are also expected to weigh on future profitability.