Google's Q4 financial report is imminent! The $4.1 trillion market value faces scrutiny, and performance growth needs to support valuation expansion

Alphabet will announce its quarterly earnings after the market closes on Wednesday, as the tech giant faces a critical test at a historic high in market capitalization. After an increase of over $2 trillion in market value over the past eight months, Alphabet's total market capitalization has reached $4.1 trillion, just one step away from surpassing Nvidia to become the world's largest company by market value. The market is generally focused on whether its earnings growth can match the current valuation multiple, which is at its highest level in 18 years.

According to Bloomberg data, the market expects Alphabet's revenue to grow by 17% and earnings per share to increase by 23%. Bank of America Securities is even more optimistic, forecasting that its revenue and earnings per share will exceed market consensus expectations, primarily due to the stability of the advertising market and accelerated growth in search and YouTube business driven by the Gemini 3.0 model. After concerns last year that it was "falling behind" in the AI race, Alphabet is reshaping market confidence in its leadership through its AI models, self-developed chips, and cloud business.

However, the surge in capital expenditures will be a key focus for investors. Influenced by Meta Platforms' significant increase in spending, Bank of America Securities has raised its capital expenditure forecast for Alphabet in 2026 to $139 billion, significantly higher than the market expectation of $119 billion. Investors will closely watch whether Alphabet will follow in Microsoft's footsteps—being sold off due to slowing cloud business growth and high AI spending—or, like Meta, prove the rationale for high investment through strong revenue guidance.

As the leader among the "seven giants of U.S. stocks" last year, Alphabet's continuous rise in stock price has pushed it to a high position. Tim Ghriskey, a senior portfolio strategist at Ingalls & Snyder, pointed out that due to the sustained strength of the stock price, even with strong performance, there is a risk of profit-taking as the market may have already priced in the good news, and investors have very high expectations for the performance threshold needed to drive the stock price further up.

Valuation at 18-Year High, Performance Needs to Perfectly Deliver

Alphabet's stock price has risen over 65% in the past year and continued its upward trend at the beginning of 2026, increasing by 8.5%. This has pushed it to a historic high in valuation: the current price-to-earnings ratio is about 28 times expected earnings, which is not only far above its 10-year average of 21 times but also the highest point since early 2008.

This high valuation means a very low margin for error. Less than a year ago, investors were worried that startups like OpenAI would erode Google's moat in the search field. Now, with the iteration of the Gemini model and the expansion of the TPU (Tensor Processing Unit) semiconductor business, market sentiment has reversed.

Daniel Flax, a senior research analyst at Neuberger Berman, believes that compared to the past, Alphabet has a broader range of growth drivers, especially as the cloud business is expected to show significant growth in the next two to three years, translating into strong free cash flow. **

Core Business Strong, Revenue and EPS Expected to Exceed Expectations

According to a previous article by Wall Street Insight, Bank of America Securities' analysis shows that Alphabet's core business is on an accelerated track. Analysts have raised their fourth-quarter revenue forecast to $95.9 billion and adjusted the earnings per share expectation to $2.65, both above Wall Street consensus.

In terms of specific business segments, search revenue is expected to grow by 15% year-on-year to $61.9 billion, primarily benefiting from the accelerated usage following the release of Gemini 3.0 and improved ad conversion rates brought by AI tools like Performance Max. YouTube ad revenue is expected to grow by 15% year-on-year to $12 billion, demonstrating robust spending on performance advertising. The cloud business is expected to maintain a high growth rate of 35%, with revenue reaching $16.2 billion. Channel research indicates that Google’s momentum in advertising innovation is strong enough to offset potential traffic pressure from new AI search formats.

Capital Expenditure May Significantly Rise, AI Investment Intensity Becomes Focus

As AI infrastructure construction enters a heated phase, spending guidance has become a key variable affecting stock prices. Bloomberg data shows that the market originally expected Alphabet's capital expenditure to grow by about 28% to $117 billion by 2026. However, Bank of America Securities pointed out that in reference to Meta's recent significant upward guidance, Alphabet may provide an annual guidance close to $140 billion during its earnings call.

This high-intensity investment is a double-edged sword. Last week, Microsoft faced historic sell-offs due to slowing cloud growth combined with heavy AI reinvestment; in contrast, Meta's strong revenue outlook validated its spending, leading to a surge in its stock price. Tim Ghriskey believes that Alphabet's situation may resemble Meta's, as long as new products emerge and growth remains high, investors are confident in overlooking aggressive spending plans. Bank of America also noted that despite the increase in capital expenditure intensity, Alphabet's capital allocation efficiency remains superior to its peers, relying on the TPU system.

Operational Efficiency Improvement, Autonomous Driving Valuation Soars

In addition to core advertising and cloud businesses, other business lines of Alphabet have also reported positive news. Its autonomous driving division, Waymo, recently raised $16 billion at a valuation of $126 billion, nearly tripling its valuation of $45 billion in October 2024.

In terms of cost control, although depreciation expenses are expected to increase significantly by 49% year-on-year, the company's overall operating expenses are well controlled. Bank of America expects the operating profit margin in the fourth quarter to increase by 119 basis points year-on-year to 39.1%. Excluding the impact of depreciation and amortization, the year-on-year increase in expense base is only 5.3%, and recruitment data shows that the company is still implementing strict cost control. Additionally, the fair value re-evaluation of holdings in companies like SpaceX and Anthropic may also bring one-time gains to quarterly performance