Alphabet whiffed. The Club stock sank on Wednesday evening after the Google parent delivered a terrible quarter with little to like beyond the cloud. Revenue in Alphabet’s second quarter did manage to increase nearly 25% year over year to $127.6 billion. But it still came up short of the $128.2 billion expected, according to the LSEG-compiled consensus estimate. Adjusted earnings per share (EPS) dropped 7% to $2.67, below the $3.02 expected. On a GAAP basis, which included investment losses, EPS was $2.12. GAAP stands for generally accepted accounting principles. Operating income of $40.6 billion missed, though it increased 30% from the year-ago period. Operating margin expanded 1.3 percentage points to 31.8%. But that came up short, too. GOOGL YTD mountain Alphabet YTD Shares plunged nearly 10% in after-hours trading. Alphabet hasn’t reported a quarterly top- and bottom-line miss in almost four years — not to mention it delivered another negative free cash flow print and signaled a big increase in AI spending next year. Bottom line Let’s start with the bright spots: Cloud and AI. Google Cloud revenue doubled year-over-year to $30.71 billion in Q3, soundly exceeding expectations. Segment operating income more than tripled to $11.12 billion, also crushing estimates. Cloud CEO Thomas Kurian said the unit now has 18 product lines, each generating more than $1 billion in revenue. The backlog exited the quarter at $561 billion, up from $514 billion in the prior quarter. A little over 55% of that, or about $308 billion, is expected to be realized over the next 24 months. As for Alphabet’s AI advancements, the company said the Gemini app now has over 1 billion monthly active users, making it the fastest-growing product in company history. Across its first-party models, Alphabet has seen token-per-minute usage increase to about 32 billion. That represents growth of about 40% sequentially and four times the year-ago period. A token is the basic unit of data for AI computing. Alphabet CEO Sundar Pichai said on the call, “With Gemini 4 Argon and now Carbon, which we announced today, we are excited to be leading at the frontier.” While those numbers are supportive of the broader AI trade, they were certainly not enough for us to argue that investors should overlook the misses pretty much everywhere else. Expect the Search miss to reignite the debate over whether artificial intelligence is cannibalizing Alphabet’s cash cow. Segment revenue increased 12% year-over-year to $63.35 billion, and management said that search queries saw their fastest year-over-year growth rate in 5 years. However, the Search revenue growth rate decelerated for the second straight quarter. The majority of Search revenue comes from advertising. Alphabet’s total ad revenue, which includes YouTube ads and Google Network, rose 10.5% in Q3. That paled in comparison to the rate of growth at Alphabet’s primary ad competitor Meta Platforms, which saw ad revenue up 26% on the quarter. Alphabet management blamed foreign exchange dynamics and a normalization of ad spend after the World Cup. Chief Business Officer Philipp Schindler also said, “It is worth noting that the strong growth in AI mode queries had an impact because of the lower monetization we were seeing in AI mode.” While Alphabet did announce that it will expand ads in AI mode into international markets and introduce multi-turn ads in AI mode in the U.S., this speaks to the concern investors have when it comes to Search and AI. Alphabet has more work to do in convincing investors that it can eventually monetize AI mode ads at a rate similar to what it has become accustomed to from Search. Alphabet maintained its full-year capital expenditure guide of between $195 billion and $205 billion. However, capex in 2027 is expected to top $300 billion. “We continue to expect our capex to increase significantly in 2027, and will provide further details on our Q4 call,” CFO Anat Ashkenazi said on the post-earnings conference call. She added that roughly 65% of capex in Q3 went to servers and networking equipment with a useful life of six years, while the remainder went into data center infrastructure with a useful life of anywhere from seven to 40 years. Alphabet’s negative free cash flow (FCF) swelled to $9.07 billion in the third quarter, impacted by the company’s capex, a $5.2 billion cash payment following the conclusion of the appeal process of a European Commission fine from 2018, and a build-up of inventory for TPU system sales. So, that FCF number is not as bad as it looks — but still sub-optimal. Alphabet exited the quarter with $265.1 billion in cash and marketable securities and $125.1 billion in debt. Additionally, the company is on the hook for future purchase commitments of $924 billion, and pre-commencement leases and other obligations of $152 billion. Ashkenazi said, “These dollar amounts reflect the maximum contractual obligations; however, a number of these agreements have variable pricing and volume flexibility, which could result in lower spend.” So, what do we think about the stock against that mostly lousy backdrop? With about $27 billion left in Alphabet’s $40 billion at-the-market (ATM) equity offering authorization, we aren’t interested in buying shares as management actively sells against us. That said, the stock is down nearly 30% from its all-time, intraday high of about $408 back in May. The valuation of about 20 times next 12-month earnings per share estimates is far from demanding, even if estimates come down a bit Thursday as analysts update their models. For now, our rating and price target are under review, as we huddle and figure out the appropriate course of action. The pressure should abate as the ATM program winds down. However, we still need operations to get back to at least meeting — and ideally exceeding — investor expectations if shares have any hope of reclaiming their former glory and making a run back to new highs. (Jim Cramer’s Charitable Trust is long GOOGL, META. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. 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