Morgan Stanley: AI Investment to Boost Core Business, Raises Alphabet (GOOG.US) Target Price to $234

We learned from Morgan Stanley that after Alphabet (GOOG.US) released its strong second-quarter financial report, they raised their target price for this stock from $225 to $234. Morgan Stanley believes that Alphabet's accelerated investment in artificial intelligence (AI) will drive long-term growth in its core business.

Morgan Stanley notes that Alphabet's latest financial report shows that its search, YouTube, and cloud business segments continue to perform strongly, but emphasizes that the company's ongoing AI strategy will become the main driver of future value.

A Morgan Stanley analyst said: "From a long-term perspective, we still believe that Alphabet occupies a favorable position in both current (desktop and mobile application) and potential (AI/machine learning, personalization, reducing complexity of applications) computing fields."

Morgan Stanley believes that Alphabet's increasing capital expenditures demonstrate its commitment to scaling up its AI platform. The company expects its expenses to reach $850 billion by 2025 and grow 15% to $1.02 trillion by 2026. Despite these numbers sparking questions about its long-term returns, analysts remain optimistic, believing Alphabet is transitioning from building an AI infrastructure to commercializing platforms and applications.

Morgan Stanley notes that Alphabet's multi-dimensional AI strategy - including AI Overviews search functionality, Gemini, and multimodal searches - will become a potential differentiator in the increasingly intense competition. Notably, management confirmed its ability-sharing relationship with OpenAI, which is often viewed as both a collaborator and competitor in the AI development field.

Regarding YouTube business, Morgan Stanley believes that Shorts short videos and subscription services will perform well, helping this business stand out in competition with traditional media. Meanwhile, Alphabet's cloud business is expected to benefit from growing demand for generative AI capabilities in the medium to long term, although there may be short-term capacity constraints.

Looking ahead, Morgan Stanley is closely monitoring two major events: the US court's expected ruling on search antitrust cases by August-end and Google's release of Pixel phones on August 20, which may provide more details about how its AI tools will integrate with hardware and search products.