Google’s 'Worst Nightmare' is unfolding as investors flee while Microsoft surges—is the search giant losing its grip?

Synopsis

Alphabet (GOOGL) stock falls 10% after Q3 earnings: Alphabet, Google’s parent, saw its shares drop over 10% in US premarket trade on Thursday after weak September quarter results. Search ad revenue grew 12%, slower than 17% last quarter, and free cash flow turned negative at $9.07 billion. Microsoft shares rose nearly 4%. Morningstar raised its fair value estimate for Alphabet to $450 and calls the stock attractively priced.

Alphabet (GOOGL) stock today: Alphabet’s shares fell more than 10% in US premarket trading on Thursday. The Google parent’s September quarter results missed analyst estimates on both revenue and profit, and slower growth in search and advertising added to investor worry.

Class A shares (GOOGL) were at $289.47, down $35.42 or 10.9%. Class C shares (GOOG) were at $287.30, down 10.75%. The stock had closed Wednesday about 4% higher, near $325. If Alphabet ends Thursday more than 9.77% lower, it will be its worst post-earnings reaction since it went public in 2004. Nasdaq-100 futures were down more than 1%.

Google stock down 10%: What slower search growth and AI Mode mean for Alphabet investors

Google Search & other revenue grew 12% to $63.3 billion. That is lower than the 17% growth in the June quarter. Total advertising revenue rose 10.6% to $82.01 billion, against 14.4% in the previous quarter.

Chief Business Officer Philipp Schindler named three reasons. Currency movements were the biggest factor. Some advertisers in Asia-Pacific were hit after the EU removed its de minimis exemption. And the June quarter had been unusually strong because of FIFA World Cup advertising, with more matches, and so more ad budgets, in June than in July.

Schindler also said people are using Google’s AI Mode more, but it has fewer built-in ads and earns less. Google is now scaling ads inside AI Overviews and AI Mode. Rivals such as OpenAI’s ChatGPT and Anthropic’s Claude are also pulling some searches away from Google, and its own chatbot Gemini has not kept pace.

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Alphabet’s free cash flow was negative $9.07 billion in the quarter, far worse than the $2.70 billion analysts had estimated. The company kept its full-year capital expenditure guidance at $195 billion to $205 billion.

Microsoft showed a different picture. Its capital expenditure, including finance leases, was $45.2 billion, up 30% from a year ago but below the $50.67 billion analysts expected. Its free cash flow fell 27% to $18.63 billion but stayed positive. Microsoft shares were up nearly 4% in premarket trade.

Ben Barringer of Quilter Cheviot said Microsoft is spending in a measured way and so offers fewer surprises. He called Alphabet’s results messy and its earnings call poorly handled. He also said Google faces an innovator’s dilemma, caught between protecting its core business and joining the disruption, and is behind peers in agentic AI.

Morningstar still sees Alphabet as attractively priced

Morningstar raised its fair value estimate for Alphabet to $450 from $433. That is 38% above Wednesday’s close and well above Wall Street’s average target of $329.68, according to Koyfin.

Morningstar pointed to Google Cloud, which grew 103% last quarter. Its backlog of contracted future revenue is five times its annualised quarterly sales, which gives the business good visibility. The firm expects search growth to slow only gradually, with most of Alphabet’s sales coming from non-search businesses within five years. It also called Google’s custom chips a differentiator that helps absorb AI costs.

Retail investors on Stocktwits seem to agree. GOOGL was the top trending ticker, and sentiment moved from “bullish” to “extremely bullish.”

Premarket prices can change before the market opens, so the final move may differ.

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