"One of the Strongest AI Players": Analyst Calls Alphabet's Dip a Buying Opportunity

Morgan Stanley analyst Brian Novak has raised his price target for Alphabet shares and expects them to rise by 17%, according to MarketWatch. In recent weeks, Alphabet and other members of the “Magnificent Seven” have lost favor in the market, as capital is shifting from hyperscalers to companies that benefit from their massive AI spending. However, according to Novak, the pullback presents a buying opportunity, as the company is actively ramping up production of its own Tensor Processing Units (TPUs).

Brian Novak raised his price target for Alphabet shares from $375 to $415, according to MarketWatch. The new target implies a 17.6% increase from the closing price on June 30. The market has not yet factored Alphabet’s growing TPU business into its valuation, the analyst explains. After many years of using the processors for internal needs and leasing them through Google Cloud, the company began direct sales to third-party customers this year, the publication notes.

According to Morgan Stanley’s forecasts, by 2028, Alphabet will bring 9 GW of new computing power online, of which 7 GW will come from its own TPUs and 2 GW from Nvidia chips. The company will reserve 5 GW for its own use and sell the remaining 4 GW on the market. This could generate up to $80 billion in additional revenue, according to Novak.

"The company's fundamentals and outlook for 2027 and 2028 are improving (...), creating a tactical opportunity to buy shares in one of the strongest AI players on the market," the analyst emphasized.

The global rollout of AI infrastructure is being hampered by a chip shortage, and this trend is likely to continue, according to MarketWatch. This situation puts Google Cloud in an exceptionally advantageous position, Novak believes. Using its own TPUs reduces the cost of building data centers, making Alphabet’s cloud business more profitable.

Although the corporation plans to allocate up to $190 billion for capital expenditures this year, it may reduce its initial costs by leasing space and partnering with other companies. In particular, Alphabet has already announced the creation of a joint venture with the investment firm Blackstone to scale up infrastructure for TPU chips, MarketWatch notes.

An optimistic outlook on the cloud business and chip sales prompted Novak to raise his revenue and earnings-per-share forecasts for Alphabet as a whole for 2027 and 2028—by 4% and 1%, respectively. According to Morgan Stanley’s estimates, Google Cloud’s revenue will soar by 106% in 2027—to $214 billion—and will increase by another 44% in 2028, reaching $308 billion. Meanwhile, the cloud segment’s operating profit is projected to reach $132 billion by 2028—nearly half of Alphabet’s total operating profit.

Over the past month, Alphabet's stock price has fallen by 9%. In premarket trading on July 1, it was down 0.2%.

The company’s shares are currently trading at a multiple of just 18x Morgan Stanley’s projected earnings per share for 2028, which indicates that they are undervalued, Novak notes. “We believe that Alphabet’s powerful, multi-pronged AI engine should eventually justify a higher market valuation,” the analyst predicts.

The vast majority of his colleagues also have confidence in the company: of the 73 Wall Street analysts who cover Alphabet, 63 recommend buying its stock, and none recommend selling it.

This article was AI-translated and verified by a human editor