Google Stock Is Crashing - Here's Why The Market Hated Earnings

Google stock is down over 11% right now after the company just reported its third quarter results. So, the market is clearly not liking what it saw in this report despite Google Cloud growing by over 100% year-over-year, which is absolutely insane. This also means that Google stock is now in roughly a 30% correction from its all-time highs, which means that it is in one of the largest corrections the stock has seen over the past decade. So, in today's video, I want to go through Google's Q326 earnings results and show you all of the good and the bad. Now, if you're someone who's also been watching my channel for some time, then you'll probably know that what I like to do is close my Discord, close my Yahoo Finance, close everything, and go through the report on my own to generate my own thoughts and conclusions from the report. Then, I will go and take a look at how the market responded to see if the market's response was in line with what I was thinking. And when I was going through Google's earnings report, it started off very good and then as I continued going through it, I found more and more things where I was like, "Ooh, the market is probably not going to like that." So, in my opinion, there is some justification for the selloff in after hours right now. But we are going to discuss if I think it's overdone and if I think that Google stock is now looking cheap. So, with that being said, I am now going to stop rambling and let's get into our Daniel Prong slideshow of Google's earnings results. All right, so let's start right from the top here. And we can see that revenue is up 25% year-over-year to 127.6 billion, which means that Google's revenue is continuing to accelerate. Google services revenue was up 11% with 12% growth to Google search. Google Cloud revenue was up 103% though. This is absolutely insane and Google Cloud's revenue growth rates are continuing to accelerate. Now, what is important to note is that TPU sales are being included in Google Cloud's revenue now. And part of the accelerating revenue growth is because there is kind of a new revenue stream in this number. Overall, Google is at a $500 billion revenue run right now. And Sundar says that the AI investments are growing Surge queries and they are at all-time highs. He also shares that Gemini has hit 1 billion users and is the fastest growing product in Google's history and YouTube now has over 150 million paid subscribers now. So overall, Google Cloud is the standout here and the rest of Google is growing much slower which we are going to get into later. Moving on to the next screenshot though, once again we can see that revenue is up 25% versus 15% topline growth last year. So, Google's overall topline is seeing a large acceleration. They also had $40.6 billion in operating income with a 32% operating margin with the operating margin expanding year-over-year as well. Operating income overall is up 30%, too. However, we can see that net income and earnings per share are down on a year-over-year basis. The headlines, the analysts, and the market are not going to like this, but it's honestly a meaningless metric right now. Google now has a ton of volatility in its earnings due to unrealized investment gains. So earnings are just not a good metric or reflection of the business's true profitability. Now with that being said, let's move on to the cash flow statement. And what's interesting is Google's operating cash flow actually declined in third quarter on a year-over-year basis by about $6 billion. But year to date, it is still up and it's now sitting at 127 billion. In my opinion, the market will not like the decline to operating cash flows though, especially when Google is investing so much into capex. However, there is a lot of noise in the cash flows right now too, just like the earnings. And also, just like there was a lot of noise in Meta's cash flow statement this quarter as well. For example, there was a $1.5 billion negative hit from accounts receivables, $2.7 billion from a growth of inventory, $3 billion from an increase of income taxes paid this quarter, $7.8 billion from other asset investments, and a $9.1 billion difference in other liabilities. So, Google had headwinds from accounts receivables, the timing of the company paying its taxes, it building more inventory, and paying off some debts. And this is the same story year to date, but year-to- date again the cash flows are still up. But for the time being, I do think that operating income might be the cleanest metric to value Google off of. That said, the business is also free cash flow negative. And this is another thing that I think the market will not like. It produced $9 billion of negative free cash flow this quarter and -4 billion year to date. Now, they also stopped their share buybacks obviously because they have raised $42 billion of cash from dilution so far this year. So, Google has started to dilute its shareholders as well because the business is producing negative free cash flow and it needs additional cash to continue investing in its AI buildout. So, Google is just like Meta and Amazon where they're going free cash flow negative to build out AI infrastructure. And I think investors should expect this to continue for the foreseeable future. Moving on, these next screenshots are going to come from the earnings presentation for this quarter. Once again, we can see 25% revenue growth, 12% Google search growth, 103% Google Cloud growth, 1 billion Gemini users, 32 billion tokens per minute, which is up 40% quarter-over-arter, and has doubled from the first quarter. And again, Google has 150 million premium YouTube subscribers. So, the business overall is still growing and the cloud business growth is incredible. Moving on to the next slide, this one shows that subscription revenue is up 11% year-over-year. Google network is up 1%, YouTube ads revenue is up 9% and again, Google search is up 12%. Now, I consider this collection of businesses and revenues like Google's core businesses, and as a whole, they grew 11% year-over-year. Their growth rates also decelerated to 11% from 14% last year. So, Google, excluding Google Cloud, is seeing a large revenue deceleration and only low double-digit growth. This is another thing that I think the market is not going to like. But with that being said, the operating margin of the core businesses did expand to 40.7% and the operating income of this group grew by 16.7% year-over-year. Moving on to the next slide, this one shows us Google Cloud's revenue and operating income. And as you can see, this business is exploding. Revenue accelerated to that 103% growth, and the operating margin expanded to 36.2%. This means that Google Cloud's operating income grew 28% year-over-year, which is absolutely insane. And this slide also shows us that Google Cloud is the main growth driver behind Google's entire business. Now, now I also made some charts of Google's historical growth rates to its core businesses with Muse going back to the third quarter of 2025. So, I went back through every single quarterly report over the past year to show you just how much Google's core businesses are decelerating. Subscription revenues grew 21% last year in the third quarter, and YouTube ads saw 15% growth. Search revenue also peaked in Q1 at 19% growth and has now decelerated down to 12%. So, you can clearly see that Google's core businesses are slowing down, which is also interesting because Meta's business is continuing to see growth rates well above 20% and sustaining around 25% growth. So, to me, the fact that Google's advertising businesses are slowing down while MetaS are continuing to grow over 25% makes Meta's earnings look even better in comparison. This is another chart I made to show the core slowdown and you can clearly see that since the first quarter of this year, growth rates have really come down and I think that this is one of the main things the market is not going to like about this quarter. Moving on, let's talk about Google's capital expenditures. And here you can see that the capex is also exploding with $51.3 billion of capex this last quarter. And the capex grew 114% year-over-year, which again caused Google to be free cash flow negative for this quarter. This next slide shows us the trend of operating cash flows and free cash flows. And we can see that operating cash flow is down 13% year-over-year while free cash flow has gone negative. This again is another thing the market is not going to like about this earnings report. Another thing I do every quarter is track the advertising revenue growth of Google, Meta, and Amazon. Amazon obviously reports its earnings tomorrow, so I will include their numbers in these charts when I make the earnings video for Amazon tomorrow after the close. By the way, make sure to subscribe to my channel if you want to see that video. But this first chart is the net advertising revenue additions per quarter and you can see that Meta is winning. Meta added $13 billion in advertising revenue in the third quarter versus Google's 7.8 billion. This means Meta is attracting more advertising dollars than Google and growing faster. Now, I also do the same thing with the trailing 12 months numbers. And here you can see that Meta is catching up to Google's advertising business. And at this rate, Meta is on track to overtake Google in the next couple of quarters. This would make Meta officially the largest digital advertising company in the world. And again, I think that this is going to happen pretty soon. This next slide shows us the total advertising revenue growth to these businesses since the second quarter of 2021 when I started tracking these metrics. And here we can see that Meta is continuing to grow strong. Whereas you can see Google's ad business is decelerating. Meta has had total growth of 131% versus Google's 100% since the second quarter of 2021. And again, all of this suggests that Meta's advertising business is doing very well. and Google's report makes Meta's numbers look even better respectively. So now let's quickly talk about Google's valuation. Well, in the trailing 12 months after this report, they have done 157 billion in operating income. Now this puts Google at around 24.5 times operating income when we include the 11% drop to the stock in after hours trading. Now, here on Stock Unblock, we can see that Google's long-term median price to operating cash flow over the past decade is about 24.3, which means that Google is now back to its historical average price to operating income multiple. This also means that Google's premium is pretty much gone now. And if it can maintain this multiple going forward, then the stock price should follow the growth of the underlying business and its underlying operating income. So personally, I do not think that Google is overvalued here and it's now starting to look quite fairly valued in my opinion, especially since Google Cloud is growing so tremendously. All right, I just finished listening to the conference call and I do have some highlights that I quickly want to add in to this video because Google stock was falling as the conference call was happening. So here are my quick notes. The first one says Google said margins will be impacted going forward, especially in the fourth quarter of this year because they're using more third-party compute that did not show up in the Q3 numbers. They also said the huge infrastructure build will weigh on the profit and loss or the earnings as depreciation continues to spike from all of their capex and the AI buildout. They did keep their 2026 capex guide in line, but then they said that 2027 capex will increase significantly just like Meta suggested too. The inventory build this quarter was also for TPUs which hit operating cash flows especially hard as we discussed. For Q4 revenue, they will see a larger headwind from currency fluctuations which will specifically hit YouTube and search even harder. So we could see YouTube and search growth rates decelerate further into the fourth quarter. They then said that AI demand is still well ahead of supply and this is why the company is investing so aggressively in capex and the AI buildout because they are still leaving revenue on the table. Then lastly, they said that the AI mode query growth weighed down search revenue growth, especially since the AI mode monetization is lower than searches so far. And the market really did not like this or respond well to it because Google is basically admitting that their AI mode is taking away from search revenue and profitability. And like always, I have created a final slide summarizing my thoughts and conclusions on Google and this earnings report. Starting from the top, Google Cloud's growth is insane and absolutely was a standout this quarter. Google Cloud is doubling on a year-over-year basis while expanding margins and producing 30.7 billion of quarterly revenue. Google Cloud revenue does include TPU sales now though, which is helping the overall revenue accelerate. Google Cloud is also the growth engine of Google's entire business. Now that said, Google's core legacy businesses are decelerating and quite rapidly, especially since the start of this year. YouTube ad revenue is back to sub 10% growth and search and subscriptions are also decelerating. This is feeding into the narrative that chat bots and LLMs are slowing down Google search. In other words, without Google Cloud, Google's numbers were actually quite underwhelming and the market is probably punishing the stock for this. Meta is also clearly winning in digital advertising and attracting a lot more advertising revenue. The market will not like that operating cash flow and earnings are declining, but they're meaningless right now in my opinion. Operating income seems to be the best metric to value Google off of right now. Overall though, on a net basis, Google's business is still growing very well. I mean, again, the revenue grew 25% with operating income growing 30%. And at the same time, I think the premium to the share price is now gone. The stock does seem to be fairly valued here at around 24.5 times operating income, at least in my opinion, especially relative to how the market has historically valued this business. If you also factor in that Google's business is accelerating and arguably becoming more diversified, then you could make an argument that relative to its history, it should still be trading for that premium that it was just over the past 6 months or so. But overall, I do still believe that Meta and Amazon are cheaper, and my focus is still going to be on buying more Amazon and Meta in my portfolio rather than adding Google here simply because I believe those businesses are still offering a lot more value. But with all that being said, that is going to wrap up my Q3 earnings summary for Google. And if you enjoyed this video, then please remember to leave a like on it. And if you want to see even more earnings content like this during earning season, then make sure to subscribe because I plan on doing both Microsoft and Amazon's earnings videos tomorrow and then covering even more throughout the earning season. And lastly, as always, thank you so much for tuning in. I truly do appreciate it and I hope to see you tomorrow in my next