According to estimates by Bank of America ( Bank of America ), the Google search business, which has driven Google's ambitious goals over the past two years, is now valued at about 10 times its earnings. FactSet data shows that the forward price-earnings ratio for the S&P 500 index is 18.7 times. The cheapest sector in the market – the energy sector – has a price-earnings ratio of 13 times.
These valuation figures caused a sharp decline in the stock price of Alphabet on Thursday. Shares of Alphabet A fell by 12.6%, closing at $283.82, marking its worst single-day performance since its listing in 2004. This decline wiped out approximately $482 billion in market value. The previous worst day for Alphabet was in March 2020, when the stock price fell by 11.6%.
What triggered the sell-off was the search business – that is, the growth engine that turned Google into a verb. In the third quarter, Alphabet's search and other revenues grew by 12% to $63.35 billion, lower than analysts' expectations of 15%. This growth rate was slower than the 17% in the second quarter and the 19% in the first quarter. Meanwhile, Google Cloud's revenue more than doubled, increasing by 103% to $30.71 billion. However, Alphabet's capital expenditures this quarter reached $51.4 billion, more than twice that of the same period last year; according to its financial report, its free cash flow was negative $9.1 billion.
Three months ago, Bank of America analyst Justin Post assigned a valuation of around 22 times for the entire company based on his estimates for earnings in 2027, stating that this level was consistent with historical averages. On Thursday, at a post-market price of around $291, he lowered this valuation to around 19 times, with the core search business being valued at only around 10 times internally. He maintained a “buy” rating, but reduced the target price from $430 to $380, and also lowered the multiple he was willing to pay from 27 times to 24 times, citing “slowing growth in high-profit margin search.”
Post and co-author Nitin Bansal write: 'The shift towards AI in search strategies will provide ammunition for the bears.'
As previously reported by Yahoo Finance, Pivotal Research CEO Jeffrey Wlodarczak stated: "Pessimists will consider this to be the first quarter in which AI begins to seriously damage its search business."
Searching for more, but the growth has slowed down even more.
Although Google indicates that the number of searches has increased, the growth rate of searches is slowing down. "Our year-over-year search growth rate has reached its highest level in the past five years," said CEO Sundar Pichai during the financial report conference call on Wednesday.
Bank of America estimates that, despite an accelerated year-over-year increase in searches, the growth in search volume after excluding the impact of exchange rates slowed down by 3 percentage points compared to the previous quarter. Analysts believe this is mainly because the comparison base for this quarter was more challenging than that of the last quarter. The report states that Google indicates that the shift in traffic to AI Overviews – namely, the summaries generated by AI at the top of search results – had a slight negative impact on this quarter. They added that in international markets, this effect “may be even greater” since the loading of ads within these summaries has only just begun to increase.
The approach taken by Google is to include more advertisements in the summaries. Chief Commercial Officer Philipp Schindler stated during a teleconference: "We are now extending the high-quality advertisements from AI Overviews and AI Mode to more users and more searches. This also means that for the first time, we are expanding our monetization scope to a global level."
These summaries can change users' behavior on the page. A study published by Pew Research Center in July 2025 found that users who saw AI summaries clicked on traditional search results in about 8% of their visits; whereas without summaries, this proportion was 15%. The study measured clicks on the website, not the advertising revenue from Google.
Paying for cloud services
The majority of the difference between the 19x profit margin of the trading business and the 10x profit margin of the search business comes from the valuation boost brought about by Google Cloud. This business had an operating profit margin of 36.2% this quarter, which is higher than the 23.7% in the same period last year. In addition, using the segment valuation method, another source of revenue needs to be taken into account. Bank of America now expects that Google's self-developed AI chips TPU will generate $75 billion in sales to external customers by 2027.
Cloud services are also a destination for capital expenditures, and the bills continue to rise. Chief Financial Officer Anat Ashkenazi stated in July that Alphabet expects capital expenditures to "increase significantly in 2027." The company confirmed its annual capital expenditure guidance this week, stating that capital expenditures are expected to reach $200 billion in 2026 and then rise to $300 billion in 2027. This quarter's financial report also included a one-time loss of $8.7 billion on the market value of SpaceX shares held by Alphabet, which Bank of America said was equivalent to a drag of 55 cents per share.
The founders also suffered financial impacts on the books. According to the estimates of Forbes, Larry Page and Sergey Brin incurred a total loss of approximately 60 billion US dollars.
A story from the year 2027
Bank of America's bullish logic is based on a timeline. The more challenging baseline will continue until the second quarter of 2027, “which could make Google the story of the second half of 2027,” analysts wrote. They also believe that a rebound in growth could occur as early as the first quarter, with international advertising in AI Overviews playing a role in this recovery.
Their model did not take into account the “moon landing project” of Alphabet at all. They wrote: “Early bets such as Waymo and quantum computing provided meaningful long-term option value,” but “were not included in the valuation.”
The research for this article and/or transcription utilized the generative AI. Reporters independently reported and verified the factual statements in the text, and manual editing was conducted before publication.
