Google's Q3 search growth misses expectations as AI Mode monetization lags, investors worry

What happened

Google lost up to ten percent of its market value after its Q3 earnings report, as an old investor fear appeared to come true. Search revenue grew about 12 percent in the third quarter, missing the 15 percent analysts had expected.

The concern centers on a tension in Google's core business: AI-powered search queries are growing fast but still generate less money than traditional search.

Key details

• Google partly confirmed this on the earnings call. Executive Philipp Schindler said that "the strong growth in AI mode queries had an impact because of the lower monetization," among other factors.
• The company nonetheless said it was satisfied with the overall trajectory and reported that the annual growth rate for search queries hit its highest level in five years.
• Traditional search has been declared dead for years and keeps growing anyway. This quarter's growth rate was slightly below expectations but in line with recent years, and Google is only beginning to monetize AI mode. The company announced plans to expand its ad program for chatbots in the U.S. and internationally.
• Other figures: Google Services revenue rose 11 percent year over year to $96.3 billion; search and other advertising formats increased 12 percent to $63.4 billion; YouTube advertising grew 9 percent to $11.2 billion; operating income reached $39.2 billion with a 40.7 percent margin.
• CEO Sundar Pichai said the Gemini app has reached one billion users, the fastest-growing product in the company's history. Google's APIs for its own models process nearly 32 billion tokens per minute, more than four times as many as a year ago—though part of that jump likely reflects token inflation from reasoning models and agentic workflows rather than higher usage alone.
• Cloud revenue more than doubled, up 103 percent year over year to $30.7 billion, with operating margin rising from 23.7 to 36.2 percent. Capital expenditures hit $51.4 billion in Q3 alone; the full-year 2026 forecast remains $195–205 billion, with a "significantly higher" figure expected for 2027.

Why it matters

This is the first time the long-standing investor fear—that AI could erode search advertising revenue—has shown up visibly in an earnings report. The link between the search growth shortfall and lower AI monetization led the market to price in the transition costs of Google's core business.

That said, AI mode monetization is just beginning, and Google is pushing commercialization by expanding its chatbot ad program. Meanwhile, cloud revenue doubling, Gemini passing one billion users, and plans to sell TPU-based AI infrastructure show the company is positioned on both the consumer-product and infrastructure sides. Management did not disclose the profit margin on selling TPU systems to outside customers, even when asked twice.

Who it affects

• Investors: the search growth miss directly drove market value swings, and the pace of AI monetization becomes a key metric for future earnings reports.
• Advertising and search industry professionals: the expansion of the AI mode ad program will shape the commercialization path of the search advertising ecosystem.
• Cloud and AI infrastructure customers: Google is sharply increasing capital expenditure and plans to sell TPU-based AI infrastructure externally, while cloud chief Thomas Kurian expects AI agents to drive demand for more compute, storage, and database capacity.

Google lost up to ten percent of its market value because an old investor fear appears to be coming true.

Search revenue grew about 12 percent in the third quarter, missing the 15 percent analysts had expected, and the shortfall might point to a tension in Google's core business. AI-powered search queries are growing fast but still generate less money than traditional search.

Google partly confirmed this on the earnings call. Executive Philipp Schindler said that "the strong growth in AI mode queries had an impact because of the lower monetization," among other factors. The company nonetheless said it was satisfied with the overall trajectory and reported that the annual growth rate for search queries hit its highest level in five years.

And part of the truth is that traditional search has been declared dead for years and keeps growing anyway. This quarter's growth rate was slightly below expectations but in line with recent years, and Google is only beginning to monetize AI mode. On the call, the company announced plans to expand its ad program for chatbots in the U.S. and internationally.

Revenue from Google Services rose 11 percent in the third quarter to $96.3 billion. Search and other advertising formats increased by 12 percent to $63.4 billion, while YouTube advertising grew by 9 percent to $11.2 billion. Operating income grew to $39.2 billion, and the margin rose to 40.7 percent. | Image: Google

CEO Sundar Pichai said the Gemini app has reached one billion users, making it the fastest-growing product in the company's history. That is hardly a surprise, given that it is essentially a search add-on, and search is already huge. Google's APIs for its own models process nearly 32 billion tokens per minute, more than four times as many as a year ago. Part of that jump likely reflects token inflation driven by reasoning models and agentic workflows rather than higher usage alone.

Cloud revenue more than doubles as Google spends heavily on what comes next

The cloud division grew 103 percent year over year to $30.7 billion, and Google is spending accordingly. Capital expenditures hit $51.4 billion in the third quarter alone. The full-year 2026 forecast remains at $195 billion to $205 billion, with a "significantly higher" figure expected for 2027.

Google Cloud more than doubled its revenue in Q3 2026 to $30.7 billion, up 103 percent from $15.2 billion a year earlier. Operating income rose from $3.6 billion to $11.1 billion, lifting the operating margin from 23.7 to 36.2 percent. | Image: Google

Cloud chief Thomas Kurian expects AI agents to drive further growth in the cloud business, since more agents in production require more compute for their tasks, more storage for agent memory, and more database capacity for reasoning, he said.

Google stands to gain on both sides, through its own consumer products and through the infrastructure other companies run on. Pichai said the company is building smaller, distilled versions of its new Carbon model that balance quality and response speed, and plans to serve them to "billions" of users through an always-on cloud runtime. The full Carbon model will initially go only to selected cybersecurity experts and the U.S. government.

Google also wants to sell AI infrastructure built on its proprietary TPU systems. Management did not disclose the profit margin on selling those systems to outside customers, even when asked twice.

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