According to Bank of America, Google’s search business, which has fueled Alphabet’s ambitions over the past two years, is now valued at approximately 10 times its earnings. According to FactSet data, the forward P/E ratio for the S&P 500 is 18.7, while the cheapest sector in the market—energy—has a P/E ratio of 13.
These valuation figures caused Alphabet's stock to plunge on Thursday. Alphabet Class A shares fell 12.6% to close at $283.82, marking its worst single-day performance since its 2004 debut. The decline erased approximately $482 billion in market value. Alphabet's previous worst day was in March 2020, when its stock dropped 11.6%.
The sales pressure was driven by the search business—the growth engine that turned Google into a verb. Alphabet’s search and other revenue increased 12% year-over-year to $63.35 billion in Q3, below analysts’ expectations of 15%. This growth rate fell short of the 17% recorded in Q2 and the 19% in Q1. Meanwhile, Google Cloud revenue more than doubled, rising 103% to $30.71 billion. However, Alphabet’s capital expenditures for the quarter reached $51.4 billion, more than double the amount from the same period last year; according to its earnings report, free cash flow was negative $9.1 billion.
Three months ago, Bank of America analyst Justin Post valued the entire company at approximately 22 times his 2027 earnings estimate, stating that this level was consistent with historical averages. On Thursday, with the after-hours stock price at around $291, he reduced this valuation to approximately 19 times, with the core search business internally valued at only about 10 times. He maintained a “Buy” rating, lowered his price target from $430 to $380, and reduced the multiple he is willing to pay from 27 times to 24 times, citing “slowing growth in high-margin search.”
Post and co-author Nitin Bansal wrote: "The shift of search to AI will provide ammunition for bears."
As previously reported by Yahoo Finance, Pivotal Research CEO Jeffrey Wlodarczak said, "Bearish observers will see this as the first quarter in which AI begins to significantly harm its search business."
More searches, but slower growth
Although Google stated that more people are searching, the growth rate of searches is slowing. “We achieved the highest year-over-year query growth rate in the past five years,” CEO Sundar Pichai said during Wednesday’s earnings call.
Bank of America estimates that, despite an acceleration in year-over-year query growth, search growth ex-churn slowed by 3 percentage points compared to the prior quarter. Analysts believe this is primarily due to a more difficult comparison base this quarter versus the last. The report notes that Google stated traffic shifting to AI Overviews—AI-generated summaries at the top of search results—slightly weighed on this quarter’s performance. They added that in international markets, this impact “may be larger,” as ad loading within these summaries has only just begun to ramp up.
Google's response has been to include more ads in the summaries. Chief Business Officer Philipp Schindler stated on the call: "We are now expanding high-quality ads in AI Overviews and AI Mode to more users and more queries. This also means we are, for the first time, extending monetization globally."
These summaries alter user behavior on the page. A study released by Pew Research Center in July 2025 found that users who saw AI summaries clicked on traditional search results in about 8% of visits, compared to 15% when no summaries were present. The study measured clicks to websites, not Google’s advertising revenue.
Pay for cloud services
Most of the valuation gap between Alphabet trading at 19 times earnings and its search business trading at 10 times comes from the valuation uplift driven by Google Cloud. The segment’s operating profit margin this quarter reached 36.2%, up from 23.7% in the same period last year. Additionally, under a segment-based valuation approach, another revenue stream must be added: Bank of America now expects Google’s proprietary AI chip, the TPU, to generate $75 billion in external sales by 2027.
Cloud business is also where capital expenditures are flowing, while bills continue to rise. CFO Anat Ashkenazi stated in July that Alphabet expects capital expenditures to "increase significantly by 2027." The company confirmed its full-year capital expenditure guidance this week, indicating that capital spending is projected to reach $200 billion in 2026 and rise to $300 billion in 2027. This quarter’s earnings also included a one-time $8.7 billion mark-to-market loss on Alphabet’s stake in SpaceX, which Bank of America noted equates to a $0.55 per-share drag.
The founders also suffered losses on paper. According to Forbes estimates, Larry Page and Sergey Brin collectively lost approximately $60 billion.
A story from 2027
Bank of America’s bullish thesis hinges on the timeline. The more difficult year-over-year comparisons will persist until Q2 2027, “which could make Google a story for the second half of 2027,” the analysts wrote. They also believe growth could rebound as early as the first quarter, aided by international advertising in AI Overviews.
Their model completely omits Alphabet’s “moonshot projects.” They wrote: “Early bets such as Waymo and quantum computing provide meaningful long-term option value,” but “are not included in the valuation.”
This article's research assistance and/or transcription utilized generative AI. Journalists independently reported and verified all factual statements in the article, which were reviewed by human editors prior to publication.