Google's AI Mode Is Cutting Into Its Search Business, Hitting Alphabet Shares

What happened to search revenue

Alphabet's latest report showed search coming in below forecasts, and the company pointed to its AI Mode for search as one reason. The feature is gaining traction, but the company earns less from it than from standard search ads.

That's critical since search remains the primary engine, providing over half of Alphabet's 2025 revenue. It also lands on top of earlier worries about heavy capital spending, concerns about keeping pace in top-tier AI models, and a prior quarter of negative free cash flow - a notable shift for a business long known for consistently generating cash.

Market reaction and the stock's path this year

The earnings miss sparked a historic selloff, even if the shares rebounded Wednesday alongside a post election surge in Big Tech. By Thursday, the stock was off 0.3% as tech names eased.

Zooming out, 2026 has been rough after a 65% jump in 2025. The slide sped up since spring, with a 19% drop in the second half that made Alphabet the second biggest drag on the S&P 500 over that stretch. October was the worst month on record, nearly a 19% fall that erased $758 billion in market value.

The decline has reset valuation. The shares trade at about 18x next-twelve-month earnings - below roughly 21 for the 10-year average - and compared with 29x in February. Stash Graham of Graham Capital Wealth Management, which owns the shares, said a move toward elevated capex and negative cash flow helps justify the compressed multiple. He was surprised by the slowdown in search growth, which complicates the math.

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Analysts, investors, and the agent question

Analysts cut their 2026 earnings per share forecasts by 4.5% over the last week. In an Oct. 29 note, Citizens Inc. analyst Andrew Boone lowered Alphabet to market perform from outperform, warning that rising competition from AI agents - which he believes will become the primary on-ramp to the internet, supplanting the browser or search - raises execution risk as Google revamps how it monetizes search. Meta's new Muse AI agent adds to that pressure.

"This is the first quarter that the negative thesis around AI crushing search has legs," wrote Dan Ives of Yorkville Ives, a bullish analyst, on Oct. 30.

Investor views and what it means for your portfolio

Some investors see offsetting strengths. Growth in Alphabet's cloud unit is picking up, and the lower valuation is starting to get attention. "The bloom is off the rose, but shares are getting to a point where they're starting to look cheap," said Ed O'Gorman, the chief executive officer at River Wealth Advisors, an owner of Alphabet shares. He added, "There are still real questions about what the revenue model will ultimately look like for agentic search, but Alphabet has other sources of revenue that are growing quite nicely, with cloud being the number one example."

The bottom line: investors are weighing a hit to a core profit engine against rising cloud momentum and a cheaper stock. Stash Graham put the core risk simply: "If the golden goose isn't a golden goose anymore, then there's reason to be worried."

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