The alphabet was blank. Club’s stock fell Wednesday night after Google’s parent company delivered a dismal quarter with little upside beyond the cloud. Alphabet’s second-quarter revenue rose nearly 25% year-over-year to $127.6 billion. However, according to consensus estimates compiled by LSEG, it still fell short of the expected $128.2 billion. Adjusted earnings per share (EPS) fell 7% to $2.67, below expectations of $3.02. GAAP EPS, including investment losses, was $2.12. GAAP stands for Generally Accepted Accounting Principles. Operating income was up 30% year over year, but below $40.6 billion. Operating profit margin increased by 1.3 percentage points to 31.8%. But even that had its limits. GOOGL YTD Mountain Alphabet YTD stock plunged nearly 10% in after-hours trading. Alphabet hasn’t reported a quarterly revenue or bottom line loss in nearly four years. Of course, it goes without saying that negative free cash flow occurred again, implying a significant increase in AI spending next year. Conclusion Let’s start with the bright spots: cloud and AI. Google Cloud’s third-quarter revenue doubled year-over-year to $30.71 billion, significantly exceeding expectations. The division’s operating profit more than tripled to $11.12 billion, also well above expectations. Cloud CEO Thomas Kurian said the division currently has 18 product lines, each generating more than $1 billion in revenue. Backlog ended the quarter at $561 billion, up from $514 billion in the prior quarter. More than 55% of this, or about $308 billion, is expected to be realized over the next 24 months. Regarding Alphabet’s AI advancements, the company said its Gemini app now has more than 1 billion monthly active users, making it the fastest growing product in its history. Across Alphabet’s first-party models, token usage per minute has increased to approximately 32 billion. This represents approximately 40% quarter-on-quarter growth and four times the year-over-year growth. Tokens are the basic unit of data for AI computing. “We are excited to lead at the frontier with Gemini 4 Argon and now Carbon, which we announced today,” Alphabet CEO Sundar Pichai said on a conference call. While these numbers supported the broader AI trade, they weren’t enough to argue that investors should overlook failures in nearly every other area. The search error is expected to reignite the debate over whether artificial intelligence is cannibalizing Alphabet’s cash cow. The division’s revenue rose 12% year-over-year to $63.35 billion, and management said it had the highest year-over-year growth in search queries in five years. However, search revenue growth slowed for the second consecutive quarter. The majority of search revenue comes from advertising. Alphabet’s total ad revenue, which includes YouTube ads and the Google Network, increased 10.5% in the third quarter. That number pales in comparison to the growth rate of Alphabet’s main ad competitor, Meta Platforms, which saw ad revenue rise 26% in the quarter. Alphabet management blamed currency fluctuations and the normalization of advertising spending after the World Cup. Chief Business Officer Philipp Schindler also said: “It is worth noting that the strong growth in AI mode queries was impacted by a decline in AI mode monetization.” Alphabet’s announcement that it will expand AI-mode advertising to international markets and introduce AI-mode multi-turn advertising in the US speaks to investors’ concerns about search and AI. Alphabet still has work to do to convince investors that it can eventually monetize AI-mode advertising at the same rate it has become accustomed to in search. Alphabet has kept its full-year capital investment target at $195 billion to $205 billion. However, capital spending in 2027 is expected to exceed $300 billion. “We continue to expect our capital spending to increase significantly in 2027 and will provide further details on our fourth quarter conference call,” Chief Financial Officer Anat Ashkenazi said in a post-earnings conference call. He added that approximately 65% of capital spending in the third quarter was spent on servers and networking equipment with a life expectancy of six years, with the remainder going on data center infrastructure with a life expectancy of seven to 40 years. Alphabet’s negative free cash flow (FCF) rose to $9.07 billion in the third quarter, driven by the company’s capital expenditures, a $5.2 billion cash payment following the appeal of a 2018 European Commission fine, and an increase in inventory to sell TPU systems. So, while the FCF numbers aren’t as bad as they seem, they’re still suboptimal. Alphabet ended the quarter with $265.1 billion in cash and securities and $125.1 billion in debt. In addition, the company has $924 billion in future purchase commitments and $152 billion in pre-commencement lease and other obligations. “While these amounts reflect the maximum value of our contractual obligations, many of these contracts have variable pricing and volume flexibility, which could result in lower spending,” Ashkenazy said. So what do you think about the stock against the backdrop of this almost dire situation? About $27 billion remains on Alphabet’s $40 billion at-the-market (ATM) stock offering approval, and we have no interest in buying the stock as management is aggressively pitching against the company. Still, the stock is down nearly 30% from its May intraday high of about $408. At around 20 times expected earnings per share for the next 12 months, the valuation isn’t too tough, even if estimates come down a bit as analysts update their models on Thursday. At this time, our rating and price target are under review, and we are considering the appropriate course of action. The pressure should ease as the ATM program winds down. But if the stock has any hope of regaining its former glory and hitting new all-time highs, it still needs to operate to get back to levels that at least meet, and ideally exceed, investor expectations. (Jim Cramer’s Charitable Trust is long GOOGL, META. See here for a complete list of stocks.) As a subscriber to Jim Cramer’s CNBC Investment Club, you will receive trade alerts before Jim makes a trade. After Jim sends a trade alert, he waits 45 minutes before buying or selling stocks in his charitable trust’s portfolio. If Jim talks about a stock on CNBC TV, he will issue a trade alert and then wait 72 hours before executing the trade. The above investment club information is subject to our Terms of Use and Privacy Policy, along with our disclaimer. 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