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Following Alphabet‘s (NASDAQ: GOOGL) (NASDAQ: GOOG) third-quarter earnings report on Oct. 28, shares plunged roughly 13% in early-morning trading on Thursday, wiping out $500 billion in market capitalization.
Indeed, investors have legitimate reasons to be concerned. Alphabet is spending hundreds of billions of dollars on artificial intelligence (AI), free cash flow has turned negative, and management is increasingly turning to the capital markets to help finance its infrastructure ambitions.
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Nevertheless, I think Wall Street is overlooking something important: Alphabet is quietly assembling one of the most vertically integrated AI ecosystems in the world. The combination of custom AI chips, a rapidly expanding cloud business, and Google DeepMind research division is the foundation for a lucrative long-term investment opportunity.
Here’s why I think the sell-off in Alphabet stock is an opportunity to buy the dip.
Why is Alphabet stock crashing?
At first glance, Alphabet’s third-quarter earnings looked impressive. Total revenue increased 25% year over year to $127.6 billion, while operating income rose 30% to $40.6 billion. However, analysts expected $128.2 billion in sales, meaning Alphabet fell short of Wall Street’s forecast.
Google Search revenue increased 12% to $63.4 billion, a noticeable deceleration from the 17% growth in the second quarter. This slowdown reiterates the theory that popular chatbots such as ChatGPT or Claude are becoming formidable alternatives to Google, undermining the platform’s appeal to advertisers.
Meanwhile, Alphabet reported earnings per share of $2.12, down from $2.87 a year earlier. It’s important to note that part of this decline was due to an unrealized investment loss related to Space Exploration Technologies rather than actual profit erosion in Alphabet’s core operations.
Perhaps the biggest concern involves cash flow. Alphabet generated $42.3 billion in operating cash flow during the third quarter. However, capital expenditures (capex) totaled $51.4 billion, resulting in a $9.1 billion free cash flow deficit.
Management doubled down on its 2026 capex budget, raising it to $195 billion to $205 billion and stressing that spending is expected to increase significantly next year. To support its infrastructure roadmap, Alphabet raised approximately $12.4 billion through common stock issuance and another $28.7 billion through debt issuance during the third quarter.
