Alphabet's Worst Day Ever

The latest turn in the AI trade... Another 'split decision'... The one number that's king... AI is half of GDP growth... Chip stocks could be carving out a bottom... Watch Whitney Tilson and Jeff Brown's replay...

Alphabet had plenty to brag about...

Alphabet (GOOGL) reported its third-quarter results after yesterday's close, and CEO Sundar Pichai opened the call with Wall Street analysts with good news...

The company is now at "a half a trillion-dollar annual run rate" in sales, he said.

Google Cloud revenue more than doubled from a year ago, to about $30.7 billion. Search queries are growing at their fastest pace in five years. Its Gemini AI tool surpassed 1 billion monthly users and "token" use is up 40% from the quarter prior. And demand for its broad AI products is so strong that Google can't keep up with it – for better or worse. (As we'll explain momentarily, that's "for worse" right now.)

Chief Financial Officer Anat Ashkenazi said that because of the "supply-constrained environment," Google started renting computing capacity from third parties at the end of the quarter – and will lean on that more over the next three months.

But Alphabet's AI-related spending plans aren't slowing down. Ashkenazi reiterated that Alphabet expects its capital expenditures ("capex") to "increase significantly" in 2027. Wall Street is penciling in more than $300 billion.

So why was the stock down nearly 13% today?...

For a second straight quarter, Alphabet spent more than it brought in.

This isn't an overnight story. We've been writing for years about how cash-rich "hyperscalers" are turning into capital-intensive businesses by betting on AI and spending on infrastructure like data centers, chips, and energy.

More recently, in August and again in September, we warned that these big tech firms were "essentially out of free cash flow" and would have to borrow to keep building. Now it's showing up on balance sheets.

In the third quarter alone, Alphabet spent about $51 billion on capex. Its businesses brought in about $42 billion in cash. That left free cash flow at negative $9.1 billion – following negative $5.9 billion last quarter... and much worse than the roughly negative $2.7 billion analysts expected this time around.

There were a few contributing factors, but the biggest is probably how Alphabet is approaching the AI build-out.

Mainly, it has been stockpiling its own tensor-processing-unit ("TPU") chip systems before it sells them to customers, who include the likes of Anthropic, Oracle (ORCL), and reportedly OpenAI and Meta Platforms (META).

Ashkenazi spun that approach as "a different cycle of cash flow generation" to describe cash going out first and coming back later when customers (presumably) pay.

Maybe that all happens and works out great for everyone involved, but meanwhile, Alphabet is looking for more cash now to keep building...

That's why the company sold $28.7 billion in bonds and another $12.4 billion in new stock last quarter. It also stopped its share buybacks for the year. Meanwhile, it has agreed to pay more than $900 billion in future purchase commitments for computing capacity, equipment, energy, and more.

Put it together, and Alphabet shares saw their biggest one-day loss ever, falling 12.7% today, beating their previous worst single-day performance by about three percentage points. Alphabet shares dropped to a level last seen in March and are now about 30% off their all-time high reached in May.

A Magnificent Seven peer fared much better with a similar (but importantly different) story...

Microsoft (MSFT) also reported its earnings after yesterday's close. But its shares fell by 0.1% today and are about 5% away from their all-time high.

The firm reported $45 billion of capex in its fiscal first quarter. That's less than the "over $50 billion" it had alluded to in July. But here's the important part... it produced about $18.6 billion in free cash flow.

There are two big reasons why...

1. Microsoft sells most of its new AI capacity to corporate customers under signed contracts before it's built. Its backlog of contracted commercial revenue hit $677 billion, up 73% from a year ago.

2. As we reported in July during the previous earnings season, Microsoft stretched the assumed life of its data centers from 15 years to 25 years. That shifted many future leases from "finance" leases, which count as capex, to "operating" leases, which don't.

The spending didn't change, but the headline capex number got smaller. That accounting decision helps Microsoft say it expects to stay free-cash-flow positive for the full fiscal year.

Still, it is spending more than $50 billion this quarter – and not entirely out of its own pockets. Bloomberg reported today that Microsoft is preparing its first U.S. bond sale since 2017 to raise at least $25 billion.

But even though Microsoft and Alphabet have similar spending stories, Alphabet is the one that got punished today. It's because of reported cash flow, or lack thereof. And this is becoming a more consistent theme for the market winners and losers. 

Last week, when Meta reported negative free cash flow for the quarter, its shares fell 7%. Three months ago, when Microsoft, Alphabet, and Meta reported earnings previously, the market reached a similar "split decision," as we called it.

Given Alphabet's weight in the cap-weighted market indexes (nearly 9% in the Nasdaq Composite Index and around 5% in the benchmark S&P 500 Index), the whole market felt the outcome today.

The Nasdaq was down 1.4%, and the S&P 500 was about 0.3% lower – despite more than 400 of the index components seeing gains and the equal-weight S&P 500 being up more than 1%.

The healthcare sector led (once again), up 2.4%, with real estate not far behind, gaining 2.2%. We've identified both areas as oversold sectors due for a bounce... and places to find appetizing investments while the air comes out of the AI trade. And that list might be growing...

Carving out a bottom...

There are some signs that the recent AI-related sell-off might be ending. Take semiconductor stocks, which are tied to AI spending. They recently fell for eight straight trading days – a streak that has only happened six other times since 1994.

You might take this as the sign of the trend breaking down, but au contraire, mon frère.

As our colleague Brett Eversole showed True Wealth Systems subscribers in last week's "Review of Market Extremes," history suggests that a period like this in "notoriously volatile" chip stocks may present an opportunity. As Brett wrote...

If you had the stomach to hold them long term, you'd have done incredibly well... with annual gains of 15.1% over the past 32 years.

Still, you can do even better by buying after a losing streak like we just saw.

Brett said these setups did lead to a short-term decline of 3.6% after three months, but they outperformed over the long term... with gains of 9.2% in six months and 18.4% over a year.

Longer term, this may go down as a market low. But given the short-term historic results following a losing streak like this, we're not ready to say it's time to go "all in" on semiconductor stocks yet.

Greg Diamond sees a similar setup...

Ten Stock Trader editor Greg Diamond looks through price patterns and technical indicators as part of his trading strategy... and he has arrived at the same conclusion as Brett. In an update to subscribers yesterday, Greg wrote...

The correction since June in semiconductors is finally complete – or as I outlined this morning – very close to complete.

Existing Ten Stock Trader subscribers and Stansberry Alliance members can read his full analysis here.

So what does it all mean?...

Well, despite the noise around Alphabet and Microsoft, AI spending isn't stopping. In fact, it's still exceeding expectations.

Just this morning, Uncle Sam reported that real gross domestic product ("GDP") rose at a 3.4% annual rate in the third quarter, up from 2.2% in the second quarter. Many forecasters had been looking for something closer to 3%.

A large amount of that growth came from AI-related investments, which contributed about 1.78 percentage points, or roughly half of all U.S. economic growth, last quarter.

Microsoft will spend more than $50 billion on AI-related investments this quarter, and Alphabet says its spending will rise significantly next year.

What's changing is who gets rewarded for spending and how. A year or two ago, any company that announced a bigger AI budget got a pop in its stock.

Today, the market is demanding more answers, like "Can you afford it?" and "What's your payoff?" Rising interest rates and the future path of inflation are factoring in, too.

Businesses that are funding AI build-outs with borrowed money and new shares will be more sensitive to market forces and risks – like interest rates or the prospects of other companies in AI's "circular" world.

But so long as these businesses are finding willing financing, it might not matter. Microsoft, for example, reportedly has already attracted $115 billion for the $25 billion bond sale we mentioned earlier.

Whitney Tilson calls this a 'hiccup'...

Our colleague Whitney Tilson has been warning that the AI boom has turned into a bubble that's starting to leak. But while some companies will get clobbered, others will survive and even thrive.

As he wrote in his free Whitney Tilson's Daily e-letter last week (and in these pages on Tuesday)...

But this will be nothing more than a hiccup for the best companies that generate gobs of cash, like Meta Platforms (META), Amazon (AMZN), Alphabet (GOOGL), and Microsoft (MSFT)...

That's why he says the opportunity in AI isn't over. For one thing, Whitney still likes Alphabet as a "great stock for conservative, long-term-oriented investors," as he wrote in his free daily letter today...

Alphabet's capex is breathtakingly huge and, frankly, I have no idea what the right number is for the company. But as I've written many times, I think management is smart to spend however much it takes to be one of the winners of the AI race.

As I discussed in my July 24 e-mail, I think the hyperscalers can leverage AI to grow their dominant businesses. So I'm willing to give them the benefit of the doubt. If Alphabet isn't seeing a return on its investment in capex, it can scale it back at any time.

Whitney says there are smaller companies to look at right now, too.

Yesterday morning, Whitney sat down on camera with Silicon Valley insider Jeff Brown, the founder of our corporate affiliate Brownstone Research, for a new free presentation to discuss where they see the next leg of the AI opportunity.

Their focus was on what they call an AI "super chip" – a new design that is 50 times faster than Nvidia's (NVDA) chips – the tiny California company behind it... and five little-known stocks they've dubbed the "Fabulous Five." Together, they believe these names could hand investors 10 times their money.

If you're eyeing chip stocks after their recent slide, these are the kinds of opportunities to consider. They're a way to put the recent volatility in the AI trade to work for you over the long run.

In the presentation, Whitney and Jeff also shared two free recommendations. The last time they gave away a free pick together, it quadrupled in just over a year. If you missed yesterday's free presentation, you can watch a replay here.

New 52-week highs (as of 10/28/26): Amgen (AMGN), Dorchester Minerals (DMLP), Exelixis (EXEL), Forum Energy Technologies (FET), Gilead Sciences (GILD), GitLab (GTLB), Kimbell Royalty Partners (KRP), Nasdaq (NDAQ), and Waters (WAT).

In today's mailbag, we have a few notes from folks looking for a replay of Whitney and Jeff Brown's event. As we mentioned just above, you can watch at your convenience here. Aside from that, do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

All the best,

Corey McLaughlin
Baltimore, Maryland
October 29, 2026