Alphabet (GOOG) (GOOGL) stock is trading flat this year and in bear-market territory after falling more than 20% from its record highs. Alphabet has seen a major reversal of fortune after being the best-performing Magnificent 7 stock last year with an impressive 65% gain. However, as I noted in my article in January, I did not expect GOOG to repeat its stellar 2025 performance this year. The stock has been weak this year and even trades below the levels at which Berkshire Hathaway (BRK.A) (BRK.B) added shares in Q2.
The Google parent is set to release its Q3 earnings today, Oct. 28, after markets close. Let's discuss whether the report would turn the tide for the stock.
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Alphabet Q3 Earnings Preview
Consensus estimates call for Alphabet's Q3 revenues to rise 24.9% year-over-year (YoY) to $127.8 billion, which would be a slight acceleration from 24.2% growth the company reported in the previous quarter. GOOG's Q3 earnings per share (EPS) is, however, expected to rise just about 2.4%.
Can GOOG's Q3 Earnings Turn the Tide?
Alphabet's Q2 earnings were mixed, and while it missed on the bottomline, the 82% YoY growth in cloud revenues shattered estimates. The stock, however, plunged following the report—and hasn't since recovered—as markets are getting wary of the company's burgeoning artificial intelligence (AI) capex and its ability to generate an appealing return on that investment.
During Q3 earnings, while the headline numbers would be closely watched, markets would look for reassuring commentary on AI. Among others, markets would expect the company to maintain or narrow its 2026 capex guidance, and any further bump to that already elevated number won't sit well with investors. I would also look for some colour for 2027 capex numbers. While Alphabet might dodge that question with the boilerplate comment that it would do so during the Q4 earnings call, analysts may probe it for some color.
For the tide to turn for Alphabet, I believe the management needs to allay fears over AI capex and monetization. Tech companies' once enviable free cash flows have fallen prey to AI capex, and in Q3 Meta Platforms (META) reported its first negative free cash flow as a public company—a dubious distinction Alphabet hit the previous quarter.
Far from repurchasing shares left, right, and center, tech giants are on a capital-raising spree. Meta, for instance, announced a $97.5 billion stock offering, $60 billion of which would be through the newly announced Class C shares. While the company said during the Q3 earnings call that it did not have any immediate capital raise plans, I noted its possibility during the company's post-earnings analysis. That capital raise announcement came shortly after the earnings release, which was admittedly a lot sooner than most envisioned.
Alphabet, which has already raised billions this year, including through the private placement of shares in which Berkshire also participated, would face questions about further capital raise plans. Again, we might not get the answer during the Q3 call, but I would look for some commentary on free cash generation. Incidentally, one of the reasons Microsoft (MSFT) shares have rallied from their 2026 lows despite all the fears over the "SaaSpocalypse" is because the company said that it expects to generate positive free cash flows next year despite an increase in capex.
Current estimates call for Alphabet to burn cash next year, and any reassuring commentary on when the company will return to generating free cash flows should help uplift sentiment.
All said, I believe the setup is quite nice for Alphabet heading into Q3 earnings, as much of the damage to the stock is already done. The valuations have also corrected since the time I last covered GOOG stock in September and noted that the risk-reward wasn't favorable then. I would put my two cents on Alphabet stock going up after the Q3 earnings and would stay put in the stock heading into the confessional.
On the date of publication, Mohit Oberoi had a position in: GOOG, META, MSFT. All information and data in this article is solely for informational purposes. This article was originally published on Barchart.com
