Goldman Sachs maintains a Buy rating on Alphabet Inc. but lowers the 12-month target price to $435

Overview

This is a Goldman Sachs review report on Alphabet Inc. (GOOGL)’s second-quarter 2026 earnings. The report’s core view is that Alphabet’s trajectory within the AI investment cycle continues to move upward, with an overall positive operating narrative: Search, YouTube Ads, and Google Cloud all showed strong growth momentum, and management continued to emphasize AI distribution, compute scale, and long-term returns on capital. At the same time, the report notes that peak capital expenditures, Gemini competitiveness, allocation of compute between internal products and external customers, and margin pressure at Google Cloud will remain key investor debate points.

Core views

Goldman Sachs maintains a BUY rating on GOOGL, believing Alphabet is well positioned in both the current desktop and mobile computing ecosystem and in future AI/ML, personalization, and low-friction application scenarios. The report emphasizes that Alphabet has both AI distribution capabilities through billion-user applications and the capacity for large-scale compute investment, a combination that remains undervalued as AI monetization moves from the infrastructure layer toward the platform and application layers. Although the target price was lowered from $440 to $435, Goldman Sachs believes the earnings results, management commentary, and revised forecasts still support a positive operating narrative relative to investor expectations.

Analysis framework

The report analyzes the company through actual second-quarter results, management guidance, segment revenue performance, changes in capital expenditures, margin impact, and the valuation model. It focuses on comparing Q2’26 actuals with Goldman Sachs and market expectations, and updates revenue, EBITDA, EPS, capex, and valuation assumptions for Q3’26, FY2026, and subsequent years.

Methodology notes

• Valuation methodsEV/GAAP EBIT and modified DCF blend

  Target price valuation framework

  The 12-month target price of $435 is based on an equal-weight blend of two methods: first, 26.0x EV/GAAP EBIT on NTM+1 year forecasts; second, 50.0x EV/FCF-SBC on NTM+4 year forecasts, discounted back three years at a 12% discount rate.

• factor_profileGS Factor Profile

  Goldman Sachs factor profile

  The GS Factor Profile compares a stock by percentile against Goldman Sachs-covered stocks and industry peers across four attributes: Growth, Financial Returns, Multiple, and Integrated.

• corporate_activityM&A Rank

  M&A probability score

  Goldman Sachs uses an M&A Rank from 1 to 3 to assess the probability that a company becomes an acquisition target; this report shows Alphabet has an M&A Rank of 3, representing a low probability and limited impact on the target price.

• databaseQuantum

  Goldman Sachs proprietary financial database

  Quantum provides detailed financial history, forecasts, and ratios, and can be used for deep single-company analysis as well as cross-industry and cross-market comparisons.

Asset mapping & comparison

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

• Alphabet Inc.(GOOGL)

  Core covered name

  Strengths

  Possesses global-scale user distribution, the Search and YouTube advertising ecosystem, enterprise AI demand through Google Cloud, and Gemini-related productization capabilities.

  Weaknesses

  AI compute buildout is driving up capital expenditures, and Google Cloud may face margin pressure due to depreciation and third-party compute transactions.

  Comparison

  The report places GOOGL within the Americas Internet coverage universe and believes its AI distribution scale and compute scale form a dual narrative that remains undervalued over the long term.

  Risks

  Advertising competition, disruption to search monetization, shifts in media consumption, high investment lowering margins, insufficient shareholder returns, and regulatory scrutiny.

• Google Cloud

  An important business segment for Alphabet’s growth and AI monetization

  Strengths

  Q2’26 revenue grew 82% year over year, backlog was approximately $514bn, enterprise AI demand was significant, and nearly 90% of Fortune 100 companies use Gemini Enterprise.

  Weaknesses

  Higher depreciation and third-party compute transactions may compress segment operating margins.

  Comparison

  As AI monetization moves from the infrastructure layer toward the platform and application layers, Google Cloud is seen as a key vehicle for Alphabet’s push into enterprise demand.

  Risks

  Compute supply, realization of customer demand, the mix of hardware sales/commitments, and margin sustainability.

• YouTube Ads

  An asset for advertising growth and user engagement

  Strengths

  Q2 revenue exceeded both Goldman Sachs and market expectations, with momentum in direct response advertising, brand advertising, event traffic, and Living Room scenarios.

  Weaknesses

  Q3 faces FX headwinds and a higher year-over-year comparison base.

  Comparison

  Together with Search, it forms a key source of resilience in the advertising business.

  Risks

  Competition for advertising budgets, changes in media consumption habits, and macro-cycle volatility.

Key data

• RatingBUYBuy rating maintained since 2021-09-12.
• 12-month target price$435.00Lowered from the previous $440.
• Current price$342.09Price disclosed on the report cover page.
• Implied upside27.2%Calculated based on the target price and current price.
• Market capitalization$4.2trDisclosed in the report’s Key Data.
• Enterprise value$4.2trDisclosed in the report’s Key Data.
• 3-month average daily trading value$11.8bnDisclosed in the report’s Key Data.
• Google Cloud Q2’26 revenue growth+82% YoYBacklog was approximately $514bn, up about $50bn quarter over quarter.
• 2026 capital expenditure guidance$195-205bnPreviously $180-190bn; Goldman Sachs forecasts approximately $205bn.
• Goldman Sachs 2027 capital expenditure forecast~$350bnManagement expects capex to increase significantly year over year in 2027.
• Q3’26 revenue forecast$125.49bnPrevious forecast was $123.57bn.
• 2026 revenue forecast$498.96bnPrevious forecast was $488.97bn.
• 2026 GAAP EPS forecast$20.51Previous forecast was $13.69, affected by approximately $98.0bn of unrealized investment gains in Q2 other income.

Impact & implications

The report’s investment implication for GOOGL is generally positive: AI demand is simultaneously strengthening cloud computing, search experience, and advertising monetization pathways, supporting the long-term growth narrative; however, higher capital expenditures imply short-term pressure on free cash flow and margins, and the market will focus more on peak capex, the investment payback cycle, and the AI competitive landscape. The target price cut reflects updated operating and capital expenditure assumptions rather than a weaker rating.

Risks

• Intensifying competition in product utility and advertising budgets.
• Industry disruption could affect monetizable search products.
• Changes in media consumption habits could affect advertising and platform traffic.
• Heavy capital investment could keep operating margins under pressure for longer than forecast.
• Future incremental shareholder returns may be insufficient or lower than expected.
• Regulatory scrutiny and changes in industry practices could alter the outlook for the business model.
• The global macro environment and fluctuations in growth-stock risk appetite could affect valuation.
• The magnitude and timing of peak capital expenditures still lack full visibility.
• Gemini’s competitive position relative to other foundation models and open-source models still requires ongoing validation.

What to watch

• The ultimate scale, pace, and timing of peak capital expenditures in 2026 and 2027.
• The speed at which Google Cloud backlog converts into revenue, and the extent to which segment margins are affected by depreciation and third-party compute transactions.
• The ongoing contribution of Gemini, AI Overviews, and AI Mode to search usage, ad conversion, and monetization.
• The growth resilience of Search and YouTube Ads amid a higher year-over-year comparison base and FX headwinds.
• How the company allocates compute across internal product development, external customer demand, and frontier model performance.
• Progress in AI monetization from the infrastructure layer toward the platform and application layers.
• The impact of regulatory scrutiny, advertising competition, and macro risk appetite on valuation.