Alphabet’s profit fell on a SpaceX markdown, but AI Mode and cash burn are the real tests

Alphabet's Q3 2026 earnings, reported on 28 October, pointed in opposite directions. Revenue rose 25% to $127.6 billion and operating income climbed 30%, yet net income fell 24% and the shares dropped roughly 8% to 10% in after hours trading, according to the market coverage we reviewed. Most of the profit decline sits below the operating line, so the share price reaction owes more to cash flow and Search than to the earnings quality of the core business. Primary documents: Alphabet's Q3 2026 earnings release and the call transcript.

Metric ($ million)	Q3 2025	Q3 2026
Net income	34,979	26,468
Diluted EPS ($)	2.87	2.12
Other income (expense), net	12,759	(8,221)
Google Search and other	56,567	63,350
Google Cloud revenue	15,157	30,709
Google Cloud operating income	3,594	11,121
Capital expenditure	23,953	51,355
Free cash flow	Not reported	(9,065)

Operating profit rose while net income fell

The difference is other income and expense. It moved from a $12.8 billion gain a year earlier to an $8.2 billion loss. On the call, CFO Anat Ashkenazi tied the loss mainly to an unrealised markdown on Alphabet's SpaceX investment after SpaceX's share price declined during the quarter. An unrealised loss changes reported income without moving cash. Diluted EPS of $2.12 compares with $2.87 a year earlier and with a consensus of $3.02 reported by Investing.com. We could not confirm whether analyst models had allowed for a SpaceX markdown.

The same line has swung the other way this year. In the first quarter Alphabet booked $37.7 billion of other income, primarily unrealised gains on non marketable equity securities, and net income rose 81%, as its first quarter release shows. Headline EPS in 2026 is partly a function of how Alphabet's private holdings are marked, which is why this analysis leans on operating income and cash flow.

Search slowed, and AI Mode is only part of the explanation

Google Search and other revenue grew 12% to $63.35 billion, against 17% in the second quarter, and was roughly flat on the second quarter's $63.3 billion. Usage did not slow. Sundar Pichai said year on year query growth was the highest in five years, and Ashkenazi described the same trend as the fastest in half a decade.

Asked about the revenue gap, Philipp Schindler gave several causes. Currency was the single largest driver of the slowdown from the second quarter. Some Asia Pacific retail advertisers were hit by the EU removing its de minimis customs exemption. Media and entertainment spend normalised after a strong second quarter driven by the FIFA World Cup, which put more advertising budget into June than July.

AI Mode is a further factor, and the only one Alphabet framed as structural. Schindler said strong AI Mode query growth weighed on Search because of the lower monetisation the company sees there. He also argued that most AI Mode queries are incremental, and that click through rates on sponsored and organic product listings in AI Mode are already similar. Both points are Google's own. The parts of the call we reviewed gave no per query revenue comparison between AI Mode and classic Search, and the click through claim has not been tested by an outside party.

Capex and cash: one number, three causes

Capital expenditure was $51.4 billion, up from $24.0 billion a year earlier. Ashkenazi said about 65% went to servers and networking equipment, which carry useful lives of around six years, and 35% to data centres, with lives of seven to 40 years. The shorter lived share matters because depreciation reaches the income statement faster. Other cost of revenues rose 32% to $35.1 billion, driven partly by depreciation and TPU hardware costs.

Operating cash flow was $42.3 billion. Free cash flow, which Alphabet defines as operating cash flow minus capex, was negative $9.1 billion. Capex is only part of that. Ashkenazi said free cash flow was also affected by an inventory build for TPU system sales and a $5.2 billion cash payment on a 2018 European Commission fine once the appeal process ended. Adding the fine back, which is our arithmetic and not a company figure, leaves free cash flow of roughly negative $3.9 billion.

The TPU point is the new one. Alphabet now places TPU systems in customers' own data centres, buys the inventory before it books the revenue, and expects more of that revenue to arrive through 2027.

The funding picture is visible in the balance sheet. Alphabet ended the quarter with $265.1 billion in cash and marketable securities, of which $90.4 billion is marketable equity securities. Long term debt was $125.1 billion, up from $98.2 billion at the end of the second quarter, and in June it priced an $84.75 billion equity raise to expand AI infrastructure. Full year 2026 capex guidance stays at $195 billion to $205 billion. Management said spending will rise significantly in 2027 and gave no figure in the transcript we reviewed.

Cloud did its job, and the funding question moves to customers

Google Cloud revenue grew 103% to $30.7 billion, and operating income rose to $11.1 billion from $3.6 billion, a margin of about 36% on our calculation. Alphabet says 18 product lines now bring in more than $1 billion a year each, and nearly 100 customers use TPUs. European customers named on the call included BNP Paribas, which is deploying Gemini Enterprise to more than 65,000 employees, and Deutsche Telekom, which is building a data lakehouse across more than 40 legacy systems. Thomas Kurian said Alphabet does not break out margins on individual products such as TPU systems.

Analysts split on what matters. David Wagner of Aptus Capital Advisors told Fortune that Cloud did what it was supposed to do and that "the problem is everything else." Dan Ives of Yorkville Ives Equity Research took the opposite view in the same report, arguing that Cloud was the result investors had been waiting for and outweighs a lighter Search number.

The call does not answer how much of the doubling comes from AI developers who are themselves funded by outside capital, and Alphabet does not break that exposure out. That is the question to bring to the fourth quarter figures: whether Cloud growth keeps pace with capex, which matters as much as whether it grew.

What it means for European advertisers and cloud buyers

Advertisers face two changes. Alphabet is expanding ads in AI Mode to international markets and adding multi turn ads in the US, where sponsored results change as a conversation continues. The parts of the call we reviewed did not name the markets, so European advertisers should ask their Google contacts for dates before budgeting. Retailers can see how Google's AI surfaces behave in practice in our report on Sweaty Betty's Google Shopping test, and in Galeria's test of Google's usage billed AI commerce search. Alphabet also launched Universal Cart this quarter, which it describes as a way for retailers to keep customer relationships while capturing sales. Our piece on why AI shopping agents still meet you as a stranger covers the memory gap that agentic carts have to close. For visibility inside AI answers rather than ads, see how AI systems mention, cite and recommend brands.

Cloud buyers should note the capacity language. Management said on the call that demand for AI infrastructure is strong and that it is working to bring more capacity online, and a summary of the call reports demand running above available capacity in some areas. Capacity limits affect rollout timing, so they belong in procurement plans alongside price. The IC Lab pricing tracker compares how AI tools bill for usage.

What happens next

• Fourth quarter results, early 2027: management said more detail on 2027 capex will follow, and the date has not yet been announced.
• Through 2027: the CFO expects more TPU system revenue to be recorded, which would start to convert the inventory build into sales.
• No date given: the rollout of AI Mode ads in international markets.

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FAQ

Sources

• Alphabet Q3 2026 earnings release (PDF)
• Alphabet 2026 Q3 earnings call
• Alphabet 2026 Q2 earnings call
• Alphabet Q1 2026 results release (SEC)
• Alphabet equity capital raise announcement, 3 June 2026
• Gotrade summary of Reuters and Fortune coverage (share move, EPS consensus, analyst comments)
• TradingKey summary of the Q3 2026 call

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