Alphabet (GOOG) Q3 2026 Earnings Preview: Will Cloud Overtake Capex?

What the Oct. 28 report will have to clear up

Alphabet (GOOGGOOGAlphabet Inc.$317.28-1.08% Valuation Verdict Fairly Valued Explore complete valuation & metrics: Alphabet Inc. ProfileRun Full Report) has also had some strange months It had posted strong results on virtually all of its operating lines in its previous report and the stock still declined. GOOG closed at $317.28 on October 23, ~22% below its 52-week high of $404.47. Investors ceased to pay for growth per se. They want to check out the price of that growth.

Alphabet will report Q3 on Wednesday, October 28, with the call at 4:30pm ET. I don’t think it’s about revenue this time, in my opinion. The issue is whether Google Cloud is converting backlog to revenue quickly enough to warrant its increased spending on capital expenditures which now exceed operating cash flow. A good, consistent Cloud print and consistent margins would help justify the spend. The stock will remain in its range if negative free cash flow continues at that pace without faster backlog conversion.

We are referring to the fact that Alphabet is spending more on capex than it generates in operating cash flow, as seen in the figure below: (Alphabet 8-K earnings releases)

The stock reacted to the spending even though Q2 was strong

The Q2 2026 earnings were excellent by themselves. Sales grew 24% y/y to $119.8 billion (23% in constant currency). The operating margin expanded ~2 points to 34%. Google Cloud sales rose 82% y/y to $24.8 billion, with segment operating income more than tripling to $8.8 billion (35.6% margin).

Search & other grew 17% to $63.3 billion. That counters the longstanding notion that AI-generated responses would take the wind out of Google’s sails. The increase in YouTube ads was slower, at 13%.

Next was the cash flow statement. Capex grew by 2X y/y to $44.9 billion while operating cash flow was $39.1 billion. That resulted in a negative free cash flow of $5.9 billion compared to about +$5.3 billion a year earlier. Buybacks were zero.

The headline figure of $9.11 also should be put into perspective. Of that, $6.26 is from unrealized gains on equity holdings, a number which has been attributed largely to the holdings of SpaceX and Anthropic. But, at the base, Alphabet picked up closer to ~$2.85 per share. The readers should regard the GAAP EPS for Q3 the same way.

The guide climbed, as did the warnings

During the Q2 call, CFO Anat Ashkenazi expanded the capex guidance to $195-$205 billion, from the previous range of $180-$190 billion, for 2026. The reason for the same was faster delivery of capacity to keep up with demand, she said. The capex for 2027 will also “increase significantly” and free cash flow will remain “under pressure,” she added.

The Q2 10-Q shows $80.6 billion of capex in H1. Hitting the new range means $114-$124 billion in H2 / ~$57-$62 billion a quarter. It is 27-38% higher than the already record Q2. Depreciation, which takes a few quarters to follow capex, increased ~43% y/y in H1.

Ashkenazi pointed out three items in particular to Q3:

• FX: “a slight FX headwind” to revenue, as opposed to one point tailwind in Q2.
• Search comps: Alphabet has begun “lapping an acceleration in Search performance that began in the third quarter last year.”
• Cloud margins: More third-party capacity will be rented as a “bridging” approach, which will lead to “modest margin pressure in the near-term.”

All three give a strong suggestion that the headline growth will be lower in Q3, and management stated as much in advance. It is important when evaluating the print.

I would like the quarter to be a good one

The search should slow but not as much as the comp indicates. Search & other was $56.6 billion in Q3 2025. If Q3 2026 only matched Q2’s $63.3 billion, growth would still be ~12% y/y. Any value in the mid-teens, given the increased comp and the FX headwind, would indicate that AI Mode (which management states has over 1 billion users per month) is adding queries, rather than replacing them.

The one number that really counts is cloud. Even with a flat reading at $24.8 billion, it would still represent ~63% y/y growth compared to Q3 2025’s $15.2 billion. This illustrates the ease of comparison and the q/q change is the better signal. Q2 Cloud grew ~24% q/q from ~$20.0 billion in Q1. If the gain is another double digit, q/q (~$27 billion or more, ~80% y/y) it would indicate that capacity is coming online. If there is a significant slowdown in growth, it will indicate that the revenue growth is being held back by the supply constraint.

The run-rate looks like it is going to be higher because of the backlog. Management projects that only slightly more than half of the cloud backlog will be converted within 24 months, which amounted to $513.9 billion as of June 30. That’s ~$32 billion a quarter evenly spread and is more than Q2’s $24.8 billion. I don’t think revenue is going to convert evenly so I’m not forecasting it, it’s a direction. Nonetheless, I would like to see the difference between backlog and revenue begin to decrease.

Easy comparison of operating margin. The operating margin in Q3 2025 was 30.5%, which was negatively impacted by a $3.5 billion fine imposed by the European Commission. The percentage, not including the fine was 33.9%. Thus the y/y gain reported will be big. The honest comparison is with ~34% and on that basis, I would consider flat-to-up as a win, considering the additional depreciation and rented capacity.

A comparison of the balance sheet with last year shows that

This is not the same company as it was a year ago, and changes since the previous report need to be considered in that light.

Not only do Alphabet return the money, but they are now raising capital. Alphabet announced in June ~$80 billion in equity raises: $30 billion underwritten (half common, half 6.25% mandatory convertible preferred), a $40 billion at-the-market (ATM) program which sells shares slowly and was not expected to start before Q3 and a $10 billion private placement to Berkshire Hathaway. By June 30, long-term debt had increased to $98.2 billion. I’ll be looking to see how many shares are sold and at what prices in Q3 since that will be the first quarter that ATM sales will be included in the share count.

A breakup of Google’s ad-tech business is off the table. A federal judge on Sept. 2 denied the DOJ’s request to divest AdX and instead opted for behavioral remedies. Google still plans to appeal the liability finding. Nonetheless, the Network business’ worst-case scenario has passed.

Competitor is selling via Google Cloud. OpenAI announced on October 21 that it will provide its frontier models and Codex via Google Cloud in the next couple of weeks. There were no financial terms disclosed, and so it won’t show up in Q3 numbers. It does make the argument that Google Cloud is a neutral marketplace for AI models, and not just a way to sell Gemini, a bit stronger.

A class action lawsuit is pending. According to a securities lawsuit filed Oct. 2, Alphabet covered up poor Gemini 3.5 Pro training results. These are allegations and not findings. I don’t think the case is going to be a big game-changer, but anything that is said about the model roadmap will be listened to.

A list of catalysts and risks ranked

1. Capex vs. cash flow (most significant risk). If capex runs ~$57–62 billion per quarter, and ocf stays at ~$39 billion per quarter, the fcf remains strongly negative and the equity and debt issuance continues. I would like to have an early range for 2027 capex. Any number that increases at a faster rate than Cloud backlog would have a negative impact on the stock.
2. Cloud conversion and margin (maximum potential gain). If the segment margin holds in the low-to-mid 30s with strong q/q revenue growth, it would indicate the spending is paying off.
3. Search durability. Any significant deceleration against the tougher comparison would bring the AI-disruption fear back just when the shares need it least.
4. GAAP EPS moves from the equity marks. SpaceX is now a publicly-traded company, so Alphabet’s stake is marked to market quarterly. Q3 GAAP EPS could be very volatile either positively or negatively based on factors unrelated to the business. I’m going to concentrate on operating income.

What management has to respond to

There were some comments by management on the Q2 call that Q3 can now put to the test. TPU systems shipped to customers were said to be a “relatively small portion” of 2026 revenue and the “vast majority” of that revenue would be in 2027. I want to hear if it’s still that time frame. The third-party “bridging” was presented as a transitional measure and I’d like to have an estimate of when it will be time to move into Alphabet’s own data centers. Alphabet, management also said, does not have any further equity sale intentions apart from the ATM scheme. A revenue beat will be less significant than any change in that.

My take on the report: it should show returns, not growth

I believe that Alphabet’s business is stronger than its stock. Meanwhile, Search is holding steady, Cloud’s growth is rare for a company of its size — and the ad-tech breakup threat is over. The other question is the stock. When a company sells shares and debt to invest in capex that they do not have in operating cash flow, investors must have proof that the money was invested well before they pay up.

What would make me more optimistic is if they could give me a double-digit growth for cloud revenue on a quarterly basis, segment margin was not really that much different from Q2 and the capex guidance for 2027 was clearly linked to backlog. What would make me more cautious is if Cloud slowdown and another capex raise were to occur. Focus on Cloud’s q/q revenue growth prior to EPS on Oct. 28.