Morgan Stanley sees long-term upside in Alphabet's AI push

Investing.com -- Morgan Stanley reaffirmed its bullish outlook on Alphabet (NASDAQ:GOOGL ) in a note Wednesday, raising its price target for the stock from $190 to $205 per share.

The investment bank highlighted Alphabet's focus on AI as a key driver of growth, citing new product launches and improved monetization strategies.

Morgan Stanley highlighted the company's progress in Generative AI (GenAI), with initiatives such as AI-powered search overviews rolling out across 100+ countries, reaching more than a billion people each month.

"The extent to which overviews drive incremental monetizable behavior should lead to incremental revenue," Morgan Stanley noted.

In addition, they believe the company's ability to monetize AI search at similar rates to traditional search has alleviated market concerns about potential revenue loss from the transition.

Morgan Stanley also emphasized the growing adoption of AI features. Google Lens processes over 20 billion visual searches monthly, with 25% tied to commercial intent, while Circle to Search is available on more than 150 million Android devices, with a third of users engaging weekly.

"Engagement is also skewing younger," said the bank, adding that it reinforces Alphabet's position at the top of the consumer funnel.

YouTube was another bright spot, with the gap between Shorts and core monetization said to be narrowing, similar to trends seen with Meta (NASDAQ:META )'s Reels.

In addition to revenue growth, Alphabet's efforts to improve efficiency were highlighted. GenAI now generates 25% of the company's new code, while operating expenses have been reduced through strategic re-engineering.

Morgan Stanley said, "GOOGL's margins continue to improve," with durable cost-cutting initiatives expected to further boost cash flow.

Looking ahead, Alphabet's capex guidance suggests steady investment, with additional increases anticipated in 2025.

Morgan Stanley projects a 7% rise in free cash flow through 2026. Its updated price target of $205 for GOOGL implies a 14% upside.

Source: Investing.com