Alphabet’s quarterly report last week showed weaker-than-expected search revenue, partly because Google monetizes its increasingly popular AI Mode at lower rates than traditional search advertising. The results intensified concern that AI agents could weaken Google’s search dominance and one of Alphabet’s main revenue sources, Bloomberg reported.

“If the golden goose isn’t a golden goose anymore, then there’s reason to be worried,” said Stash Graham, chief investment officer at Graham Capital Wealth Management, which owns Alphabet shares.

AI Mode pressures Google’s search model

Google said the rollout of AI Mode, its AI-powered search format, affected search-segment results because it generates less revenue than traditional search ads.

The issue is significant for Alphabet because search accounted for more than half of its revenue in 2025. The company also faces rising capital spending on AI infrastructure, concern that it could fall behind in developing cutting-edge models and negative free cash flow in the previous quarter.

Alphabet shares rose 65% in 2025 but lost momentum from the start of 2026. They fell 19% during the second half of the year, becoming the second-biggest drag on the S&P 500 over that period.

In October alone, the shares dropped nearly 19%, their worst monthly performance in company history, reducing Alphabet’s market capitalization by $758 billion. The stock was trading at $285.33 at the time of writing, according to Yahoo! Finance.

Competition from AI agents has added to the pressure. In an October 29 report, Citizens analyst Andrew Boone downgraded Alphabet shares to “market perform” from “outperform,” citing the risk of a shift to a new search monetization model as agents potentially replace browsers and search engines as the main way people access the internet.

“This is the first quarter that the negative thesis around AI crushing search has legs,” analyst Dan Ives of Yorkville Ives wrote in an October 30 note.

Valuation falls as forecasts decline

Analysts cut their 2026 earnings-per-share forecasts for Alphabet by 4.5% over the past week. Investors are also concerned about the scale of spending on AI infrastructure and uncertainty over when those investments could pay off.

The sell-off lowered Alphabet’s valuation to about 18 times projected annual earnings, down from 29 times in February and below its 10-year average of about 21 times.

“It is trading at a respectable multiple right now if the search weakness is temporary, as I think it is. But if there’s a lasting deterioration, then it should trade even lower,” Graham said.

Investors have cited accelerating growth in Alphabet’s cloud business as a positive. Ed O’Gorman, chief executive of River Wealth Advisors, said the sharp fall in the share price could create a buying opportunity.

“The bloom is off the rose, but shares are getting to a point where they’re starting to look cheap,” O’Gorman said. He added that despite uncertainty over the future revenue model for AI-based search, Alphabet’s other businesses, particularly cloud, continued to show solid growth.

Source: Incrypted