Goldman Sachs maintained a Buy rating on Alphabet after reviewing the company’s third-quarter results, but cut its 12-month price target to $385 from $435, a reduction of about 11.5%. Based on the October 28, 2026 closing price of $324.89 cited in the material, the new target implies roughly 18.5% upside.
The debate in the report is straightforward. Google Cloud is turning AI demand into visible revenue growth and higher margins, while Search came in softer than expected and management signaled another step-up in capital spending next year. That leaves investors weighing whether cloud growth can offset rising infrastructure costs and how much AI can improve the long-term monetization profile of Search.
Cloud revenue doubled as TPU sales added momentum
Alphabet reported third-quarter consolidated revenue of $127.577 billion, up 24.7% year over year and broadly in line with market expectations. Performance across business lines, though, was uneven.
Google Cloud revenue reached $30.709 billion, up 102.6% from a year earlier. That was 3.9% above Goldman’s estimate and 5.7% above consensus. Cloud operating income came in at $11.121 billion, and operating margin rose to 36.2%, above the 33.3% expected by the market and about 12.5 percentage points higher than a year earlier.
Goldman said enterprise AI demand was a major driver of that growth. The material, citing management, said sales of Tensor Processing Unit, or TPU, systems made a notable contribution. TPU is Google’s custom chip built for machine learning workloads and supports both training and inference. Management said nearly 100 customers are already using TPU, and the related business is expected to expand further in the fourth quarter and in 2027.
That points to a new revenue stream forming around Google’s AI infrastructure through enterprise demand. Goldman said it remains constructive on the scaling opportunity for custom chips, both for internal use and for external sales.
Even so, the cloud beat did not remove pressure on group profitability. Alphabet posted operating income of $40.576 billion in the third quarter, about 6.5% below market expectations. Google Services operating income was $39.157 billion, also below expectations, meaning cloud strength did not fully offset weakness elsewhere.
Search growth slowed, and AI monetization still needs proof
Google Search and other revenue, still the company’s core revenue engine, was $63.35 billion in the third quarter, up 12% year over year. That was 2.4% below consensus and only 0.1% higher sequentially.
Goldman attributed the slowdown mainly to foreign-exchange headwinds. It also pointed to changes in ad spending in specific sectors: some Asia-Pacific retailers were affected by the European Union’s removal of the de minimis exemption, while media and entertainment ad spending normalized after the World Cup ended.
The comparison also gets tougher in the fourth quarter. Search revenue growth began to accelerate from the third quarter of 2025, raising the year-over-year hurdle for upcoming periods. Management also said foreign-exchange headwinds in the fourth quarter would be slightly larger than in the third.
YouTube advertising also missed expectations. Third-quarter revenue was $11.207 billion, up 9.2% year over year and about 2.1% below consensus.
Management, however, said AI is improving ad clicks and conversions while strengthening personalization. Adoption of tools such as AI Max and Performance Max, or PMax, is also rising among advertisers.
On the search side, management said most queries in AI Mode represent new demand and tend to appear earlier in the consumer decision process. That could create future monetization opportunities, but the path from usage growth to ad revenue still needs to be demonstrated, both in conversion and in monetization efficiency.
Subscriptions offered some support. Goldman said subscription revenue is growing faster than advertising, driven mainly by demand for YouTube Music, Premium, and AI plans within Google One. The material cited management as saying YouTube Premium now has more than 150 million subscribers.
Heavy compute demand extends pressure on cash flow
Rising demand is also forcing Alphabet to keep expanding compute capacity. The company maintained its 2026 capital expenditure guidance at $195 billion to $205 billion and said 2027 capex would increase sharply from 2026 levels.
According to the material, Alphabet needs to serve internal product development, external enterprise customers, and Gemini model development at the same time. That makes resource allocation and investment returns central issues for investors.
Goldman expects Alphabet’s capital expenditure to rise from about $203 billion in 2026 to about $350.4 billion in 2027, then to about $415.2 billion in 2028. The material notes that the 2027 and 2028 figures are Goldman forecasts, not company guidance.
Infrastructure spending affects financial performance through two channels. Cash goes out first during construction and procurement. Once those assets are put into use, the cost then flows through the income statement over time through depreciation and related charges.
Goldman expects depreciation and amortization to increase from about $38.8 billion in 2026 to about $75 billion in 2027 and about $115.3 billion in 2028. Even if growth in other expenses slows, the depreciation burden is still expected to rise.
Under Goldman’s cash-flow model, free cash flow is projected at negative $12.6 billion in 2026, negative $40.6 billion in 2027, and negative $15.2 billion in 2028. The material defines free cash flow as cash generated from operations minus capital expenditure. In Goldman’s model, that means infrastructure investment would exceed operating cash generation over the next several years.
Investors, in turn, need clearer evidence on the eventual return on invested capital and on how additional compute capacity will convert into durable revenue and cash returns.
Goldman lowered earnings estimates and valuation multiples
After the results, Goldman cut its 2027 earnings-per-share estimate for Alphabet to $15.01 from $15.50 and reduced its 2028 estimate to $18.53 from $19.15, down about 3.1% and 3.3%, respectively.
The target-price revision also reflected changes in valuation assumptions. Goldman used an equal-weight blend of an operating-profit valuation and a forward cash-flow valuation. Within that framework, the enterprise value to U.S. GAAP EBIT multiple was reduced to 24x from 26x, while the multiple and discount rate used in the forward cash-flow portion were left unchanged.
Goldman’s long-term Buy case remains tied to Alphabet’s distribution reach, compute scale, and custom chip advantage. The material says Google has multiple products with more than a billion users, giving it a direct way to deploy AI features into existing applications. Large-scale compute and custom silicon support product development, may improve efficiency, and can also serve external enterprise demand.
Goldman said the value of those capabilities may still be underappreciated as AI commercialization expands from infrastructure into platform and application layers. In the near term, though, the key variables for valuation remain whether Search revenue can stay resilient, how long elevated investment will last, and when free cash flow can recover.
The next points to watch are whether cloud orders convert into revenue and cash collection, whether AI search can build stable advertising monetization, and whether growth in capex and depreciation matches business returns.
