Wells Fargo Lowers Alphabet Price Target to $365

Wells Fargo analyst Ken Gawrelski lowered the price target on Alphabet (NASDAQ: GOOGL) to $365 (from $371) while maintaining an Overweight rating.

“See search revenue deceleration driven by user experience transition to AI Overviews, not engagement or macro / click monetization issues.

Mgmt comments on record high search query growth aligns w/ our data (Exh 2) showing search sessions across both core Google and Gemini posting 36% y/y growth in 3Q, the fastest growth in many years.

View rapid expansion of AI Overviews, now at estimated 82% of global query results, as primary driver of divergence between search usage and paid clicks (Exh 1).

We leverage SEMrush industry data to estimate 82% penetration of AI Overviews across search results across countries representing 55% of global GDP ex-China (Exh 4).

Importantly, AI Overviews penetration increased ~7pts in the month of October, with a high of +26pts in France and low net change of +3pts in the US, as well as rising rapidly throughout 3Q (Exh 3).

As such, we believe headwinds are likely to continue for the next two quarters with potential for moderating impact in 2Q:27 (Exh 5).

Based on the data, we cut search revenue estimates further to +9% in 4Q:26, a point below consensus, and +4% in 1Q:27, 5 points below consensus, before growth begins to recover to +6% in 2Q:27.

Between 2Q:24 and 3Q:26, paid clicks / session has been almost perfectly negatively correlated to US desktop AI Overviews penetration at -0.97 (Exh 5).

We assume this correlation continues and AI Overviews penetration rises to 79% / 87%, depressing paid clicks to +4% / 0% in 4Q:26 / 1Q:27, resp. (Exh 6).

We are surprised that Google has pushed so aggressively on AI Overviews despite more modest competitive pressure from ChatGPT.

While extraordinary engagement gains support user preference for the product transformation, the business model doesn’t appear ready yet to offset suppressed paid clicks w/ higher CPCs or new ad units.

For signs of improvement, watch for (1) narrowing gap between sessions and paid clicks and (2) material improvement in CPCs to reflect the value of more qualified leads.”

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