Is Alphabet's Core Search Business in Trouble? Looking Past the Headline Revenue Growth Provides a Clear Answer.

Investors did not like what Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) management had to say when it announced its third-quarter earnings. While the company's massive cash burn gets all the attention as it builds more data centers to meet demand from AI developers, its cash cow, Google Search, has also raised some red flags.

The Search business saw revenue growth decelerate sharply last quarter, climbing just 12% year over year, compared to 17% growth in the second quarter. Management warned that revenue growth could remain under pressure in the fourth quarter. That's led many to conclude that the rise of AI is finally starting to affect Alphabet's main profit center, which makes its massive AI build-out much riskier.

Investors need to dig deeper than the headline numbers to determine exactly what's going on here. Here's what management had to say and what it means for patient, long-term investors.

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How people use Search is changing

Even as Google Search revenue growth is slowing, people are using it more and more. Management reported the highest year-over-year growth in search queries in the last five years. Management also said the way people use Search is changing. "Their queries are longer, personalized and multimodal," CEO Sundar Pichai said during the company's third-quarter earnings call.

That means users are providing a ton of details about exactly what they're looking for using text, voice, photos, and other uploads to Google. Those details can be extremely valuable, as they can ultimately facilitate better ad targeting for users.

Alphabet has successfully leveraged generative artificial intelligence on the business-facing side of Search, making it easier for businesses to create and target ad campaigns to maximize value. As more search engagement shifts to Google's AI Mode and other new interfaces, it's only a matter of time before it finds the right product fit to maximize the value of its engagement and the valuable data its users provide for advertising.

In fact, investors might not have to wait long to see revenue reaccelerate. Management said it's already scaling efforts to show ads in AI Overviews and AI Mode, bringing the ad load more in line with traditional Search. "[O]ur user research shows that people are comfortable with ads on these surfaces and find them highly relevant," Philipp Schindler, Senior Vice President and Chief Business Officer at Google, said during the earnings call.

In the meantime, Alphabet is bringing more AI features with potential monetization paths to where its users are already highly engaged. It's rolling out more agentic AI features directly in AI Mode in Google Search, after finding success with them in the Gemini app (which is used by 1 billion people). "One area I'm excited about is helping people get things done, be it booking reservations, filling in forms, scheduling appointments, or making purchases," Pichai said. Most of those examples open the door for more monetization opportunities.

Don't let the headlines distract

While it's worth paying attention to the developments at Google Search, looking beyond the headline number to see how engagement and monetization plans are changing for the product is more important. The outlook for the business remains strong, and the slowdown in revenue growth will likely be more gradual than the previous quarter suggests, with occasional ups and downs over the next few quarters as it scales monetization across new surfaces.

The Search business also shouldn't distract from the big growth story at Alphabet: Google Cloud Platform. Overall cloud computing revenue more than doubled last quarter with strong margin expansion. While management expects some margin pressure in the next few quarters as it uses more third-party compute capacity, the business should see considerable revenue growth. The returns on its massive investments in new data centers appear well worth the cost, as Google Cloud is set to surpass Search as the largest driver of operating income growth in 2027. That said, Search is no slouch in that department.

The near-term pressure on the stock price appears to be an excellent buying opportunity for patient investors. Shares now trade at less than 19 times forward earnings expectations, indicating declining confidence in the company's growth prospects. But the underlying data suggest its cash cow is in good shape, and its biggest growth driver is on track to deliver excellent returns for shareholders.

Adam Levy has positions in Alphabet. The Motley Fool has positions in and recommends Alphabet. The Motley Fool has a disclosure policy.