UBS maintains Neutral on Alphabet and lowers target price from US$400 to US$379

Overview

This report is a company research update by UBS on Alphabet Inc. - Class A (GOOGL). The core conclusion is that the revenue growth highlights in 2Q26 results have been fairly fully reflected in expectations, while higher CapEx intensity, depreciation and amortization, hiring needs, and SBC have increased uncertainty around future EPS and free cash flow growth, leading UBS to maintain a Neutral rating and lower the target price.

Core views

UBS believes that although Search and Cloud performance was solid, the magnitude of outperformance versus expectations weakened relative to 1Q26, resulting in only modest revenue forecast revisions; meanwhile, upward revisions on the cost side were more pronounced, with 2027E and 2028E costs raised by about 2% and 3%, respectively. The report emphasizes that against a backdrop of valuation multiples near elevated levels and EPS more likely to be revised downward, GOOGL's risk-reward is neutral and inferior relative to AMZN.

Analysis framework

The report uses a combination of earnings tracking, segment revenue forecasting, cost and CapEx updates, GAAP EPS forecast revisions, and scenario valuation. UBS focuses on assessing Cloud backlog conversion, Search advertising growth, YouTube advertising drivers, GenAI investment spending, AI Overviews monetization, and competitive risks, and derives the target price by applying a P/E multiple to 3Q27-2Q28E GAAP diluted EPS.

Methodology notes

• Valuation methodsGAAP P/E Valuation Method

  Calculate the target price by applying a target P/E multiple to 3Q27-2Q28E GAAP diluted EPS.

  UBS values Alphabet using GAAP P/E; the base case uses a 26x multiple applied to 3Q27-2Q28E GAAP diluted EPS of US$14.64, resulting in a target price of US$379.

• Scenario AnalysisUpside/Base/Downside Scenario Analysis

  Set upside, base, and downside scenarios through assumptions for revenue CAGR, operating margin, EPS, and P/E multiples.

  The upside scenario target price is US$465 and the downside scenario is US$253; the report states the upside/downside skew is 1.7x.

• Earnings ForecastingSegment Revenue and Expense Forecasting

  Separately update revenue assumptions for Search, Cloud, and YouTube, as well as cost assumptions such as CapEx, D&A, compensation, and SBC.

  The report shows limited changes on the revenue side, but rising CapEx and personnel costs drove expense forecasts higher, weighing on 2027E and 2028E EPS.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• GOOGL.US

  Covered target

  Strengths

  Search, YouTube, and Google Cloud continue to have scale advantages; Cloud backlog exceeded expectations; YouTube is driven by the World Cup, clickable ads on connected TVs, and U.S. midterm election advertising spending.

  Weaknesses

  Limited room for revenue upgrades, with rising pressure from CapEx, D&A, hiring, and SBC, and insufficient visibility into FCF returning to historical growth levels.

  Comparison

  UBS believes that under valuation near elevated levels and EPS downgrade risk, the risk-reward skew is less favorable relative to AMZN.

  Risks

  GenAI search competition, uncertainty over monetization of AI investments, regulation and antitrust, Cloud profitability expansion, and a slowdown in advertising demand.

• GOOG.US

  Target to which the same investment view applies

  Strengths

  The report explicitly states that this research and valuation apply to both GOOGL and GOOG.

  Weaknesses

  Shares the same cost, CapEx, and competitive pressures as GOOGL.

  Comparison

  Represents the same company's economic interest as GOOGL.

  Risks

  Same as Alphabet overall risks.

• AMZN

  Relative comparison target

  Strengths

  UBS believes its risk-reward skew is more favorable than GOOGL's.

  Weaknesses

  The report mentions Amazon faces risks such as e-commerce competition, deteriorating consumer sentiment, and capital intensity coming in higher than expected.

  Comparison

  GOOGL is less attractive relative to AMZN given near-peak valuation and EPS downgrade risk.

  Risks

  Competitive intensity, consumer demand, and capital expenditure pressure in AWS or the e-commerce platform.

Key data

• 12-month ratingNeutralUBS maintained its rating unchanged.
• Target priceUS$379.00Lowered from the previous US$400.
• Current priceUS$342.09As of July 22, 2026.
• 2Q26 total revenueUS$119.8BAbove UBS's estimate of US$119.5B and the market consensus of about US$116.5B/US$116.9B.
• 2Q26 GAAP diluted EPSUS$9.11Above UBS's estimate of US$6.45 and the consensus of US$2.88, though partly driven by an increase in unrealized gains on equity securities.
• Cloud backlogabout US$510BAbove about US$462B in 1Q26 and also above UBS's original forecast of US$482B.
• 2026 CapEx guidanceUS$195B-205BAbove the previous US$180B-190B and also above the market consensus of about US$186.5B/US$187B.
• 2026E/2027E/2028E GAAP diluted EPSUS$21.00 / US$17.22 / US$13.52Previously US$18.74 / US$17.68 / US$14.08, respectively.
• Base case valuation assumption26x P/E × US$14.64 EPS = US$379EPS is 3Q27-2Q28E GAAP diluted EPS.
• Upside scenarioUS$465Assumes 2-year total revenue CAGR of 26%, operating margin of 34%, EPS of US$16.33, and 29x P/E.
• Downside scenarioUS$253Assumes 2-year total revenue CAGR of 15%, operating margin of 30%, EPS of US$12.06, and 21x P/E.

Impact & implications

The report takes a cautious view on investment implications: Alphabet's revenue resilience and Cloud backlog support medium-term growth, but rising AI infrastructure investment, depreciation and amortization, and personnel costs weaken profit elasticity; if the returns on AI search and Cloud investment do not become clearer soon, the market may continue to lower EPS expectations or limit valuation expansion.

Risks

• CapEx in 2026 and 2027 may continue to rise, bringing higher D&A and downward EPS revision pressure.
• Competition in GenAI search products remains unresolved and may even intensify, including Meta AI search, Perplexity, and the OpenAI ChatGPT ecosystem.
• The monetization path and ROIC of AI products such as AI Overviews, AI Mode, and Gemini remain unclear.
• Regulatory, antitrust, and DOJ investigation-related risks.
• There remains uncertainty over whether Google Cloud can achieve sustainable profitability expansion amid high growth and high investment.
• Advertising spending may decline due to macro or industry factors.
• Higher hiring needs and SBC may continue to compress margins.

What to watch

• The actual conversion rate of Cloud backlog into revenue over the next two years.
• Whether 2026 and 2027 CapEx, D&A, and AI infrastructure investment continue to be revised upward.
• Whether the monetization rate of AI Overviews versus traditional Search can remain consistent, and whether ROAS and CPC improve.
• Whether Search growth in verticals such as retail and financials continues.
• YouTube's revenue contribution from follow-on World Cup events, U.S. midterm election advertising, and connected TV advertising.
• The commercialization progress of GenAI search competitors and changes in user share.
• Management's subsequent guidance on hiring, SBC, and short-term margin compression.