After reviewing the earnings report, Goldman Sachs and JPMorgan Chase both lowered their target prices for Google.

华尔街见闻10-29 18:37

Following the release of Google's parent company Alphabet's third-quarter earnings report, major Wall Street institutions immediately lowered their target prices. Lower-than-expected search revenue, coupled with headwinds in foreign exchange and persistently high capital expenditures, has significantly increased market concerns about its free cash flow prospects.

According to the Wind Chasing Trading Desk, JPMorgan Chase has lowered its price target for Alphabet from $425 to $375. Goldman Sachs also lowered its 12-month price target from $435 to $385, a decrease of approximately 11.5%, but maintained its buy rating. Based on Goldman Sachs' closing price of $324.89 on October 28, the new target price corresponds to an upside potential of approximately 18.5%.

Financial reports show that Alphabet's search and other business revenue in the third quarter was $63.35 billion, lower than Goldman Sachs' expectation of $64.2 billion and the market consensus expectation of $64.895 billion. At the same time, the company maintained its guidance of $195 billion to $205 billion in capital expenditures for 2026 and forecast a further significant increase in capital expenditures in 2027, putting pressure on the free cash flow outlook and becoming one of the core focuses of investor attention.

Search revenue is under pressure, with foreign exchange and the comparison base acting as a double drag.

Alphabet's search and other business revenue increased by 12% year-over-year in the third quarter, lower than market expectations. Management attributed the main reason to headwinds in foreign exchange, while pointing out that the company is facing a difficult revenue comparison base - the acceleration in search revenue growth began in the third quarter of 2025, which put pressure on the year-over-year data for this quarter.

In addition,Goldman Sachs analysts also pointed out special factors in several vertical industries: some retailers in the Asia-Pacific region were affected by the EU's policy of eliminating minimum tax exemptions, while media and entertainment advertising spending normalized and declined after the 2026 World Cup. Management stated that the foreign exchange headwinds in the fourth quarter are expected to be slightly greater than in the third quarter, and the pressure on the comparative base will continue.

Looking at the full-quarter performance, Google Services' total revenue was $96.3 billion, lower than Goldman Sachs' estimate of $97.575 billion; YouTube advertising revenue of $11.207 billion also fell short of expectations. GAAP earnings per share were $2.12, significantly lower than Goldman Sachs' expectation of $2.96 due to a loss of approximately $8.7 billion resulting from fluctuations in the fair value of the company's equity assets.

Strong cloud business, AI demand drives better-than-expected revenue

Cloud business became the biggest highlight of this quarter's financial report. According to Goldman Sachs data, Google Cloud's revenue reached $30.709 billion in the third quarter, a year-over-year increase of approximately 103%, exceeding Goldman Sachs' expectations of $29.556 billion by approximately 3.9% and exceeding market consensus expectations by approximately 5.7%. Operating profit margin expanded by approximately 1,250 basis points year-over-year to 36.2%.

Management disclosed that Google Cloud's revenue backlog has now reached $561 billion, a year-on-year increase of 256%, of which about 55% is expected to be converted into revenue within the next 24 months. A Goldman Sachs report points out that enterprise AI demand is strong—including a significant contribution from TPU system sales, with nearly 100 customers already using TPU, and further volume is expected to increase in the fourth quarter and 2027. Management also stated that insufficient supply of computing resources remains a key bottleneck restricting the further growth of cloud business.

Regarding the subscription business, management disclosed that YouTube Premium has over 150 million subscribers, with subscription revenue growing faster than advertising, and demand for Google One AI packages remaining strong.

High capital expenditures and negative free cash flow have drawn attention.

Alphabet maintains its 2026 capital expenditure guidance of $195 billion to $205 billion, while Goldman Sachs' updated forecast is approximately $203 billion.The company has not yet provided specific guidance for 2027, but has made it clear that spending will "increase significantly," with Goldman Sachs expecting it to be approximately $350.4 billion.

Against this backdrop, Goldman Sachs further revised its 2027 free cash flow forecast for Alphabet from -$40.567 billion to -$40.567 billion.Free cash flow turned negative in 2026 (-$12.62 billion), a significant reversal from $73.266 billion in 2025. Depreciation and amortization expenses have also risen sharply, with Goldman Sachs projecting $38.774 billion in 2026 and a jump to $75.017 billion in 2027.

Management stated that it expects the return on capital (ROIC) to remain well above the cost of capital, but acknowledges that the current divergence between free cash flow and large-scale investments will continue in stages until calculation constraints are eased.

Goldman Sachs lowered its target price but maintained its buy rating.

Goldman Sachs lowered its 12-month price target from $435 to $385, mainly reflecting a downward revision of its forward earnings estimate and a slight contraction in its valuation multiple. In terms of valuation methodology, Goldman Sachs uses a 50% equal-weighted mix of EV/GAAP EBIT and adjusted DCF (EV/FCF-SBC). The EV/GAAP EBIT multiple has been lowered from 26 to 24 to reflect lower forward earnings estimates, while maintaining the growth rate of approximately 0.80.

Regarding earnings forecasts, Goldman Sachs has lowered its 2026 EPS forecast from $20.54 to $19.76, its 2027 EPS forecast from $15.50 to $15.01, and its 2028 EPS forecast from $19.15 to $18.53. Based on the current share price, GOOGL corresponds to approximately 18 times Goldman Sachs' 2027 GAAP EPS forecast (excluding net cash) and approximately 15 times in 2028.

In a report, Goldman Sachs analysts Eric Sheridan's team pointed out that they remain optimistic about Alphabet's long-term strategic positioning in the AI consumer and enterprise computing fields, believing it possesses both large-scale AI distribution capabilities (over 1 billion user applications).matrixThe advantages of large-scale computing power investment and the dual narrative logic that AI monetization is currently underestimated by the market in the process of evolving from the "infrastructure layer" to the "platform layer" and "application layer". The main downside risks include: the search business being impacted by industry disruption, long-term suppression of profit margins by heavy asset investment, stricter regulatory scrutiny, and the impact of the macroeconomic environment on the valuation of growth stocks.

Disclaimer: Investing carries risk. This is not financial advice. The above content should not be regarded as an offer, recommendation, or solicitation on acquiring or disposing of any financial products, any associated discussions, comments, or posts by author or other users should not be considered as such either. It is solely for general information purpose only, which does not consider your own investment objectives, financial situations or needs. TTM assumes no responsibility or warranty for the accuracy and completeness of the information, investors should do their own research and may seek professional advice before investing.

Report

Comment

No comments yet

To The Moon