By Kit Norton
Google parent Alphabet has been going all-in on AI spending and it has tested some investors' nerves, especially after a sizeable equity raise earlier in June to fund upcoming capital expenditures. It's a prime example of how Big Tech's AI ambitions are outstripping operating cash flows and forcing companies to tap debt and equity markets.
On the heels of Alphabet's $85 billion offering, Morgan Stanley believes Wall Street should brace itself for the company to spend $375 billion in 2028. Analysts led by Brian Nowak late Monday raised their Alphabet 2027 capital expenditures estimate by 17% to $350 billion. The firm also projects the Google parent will spend $375 billion on AI in 2028.
Alphabet has said itself that capital expenditures will " significantly increase" in 2027, up from the company's expectation for 2026 capex to total up to $190 billion. Morgan Stanley's estimate for 2028 would represent nearly double Alphabet's spending this year.
Morgan Stanley sees this outlay of cash as a good thing, allowing the tech giant to bring around nine gigawatts of compute capacity online by 2028. Nowak estimated that Alphabet revenue will grow 4% and 1%, respectively, in 2027 and 2028. The big sales driver will be the company's cloud-computing arm, with the bank forecasting Google Cloud revenue growth of 106% in 2027 and 44% in 2028.
On this basis, the firm raised its price target on Alphabet stock to $415 from $375 and maintained an Overweight rating. That price target represents 16% upside from current trading levels.
Alphabet stock rose 0.7% to $356.08 on Tuesday. Shares closed up 4.8% to $353.65 on Monday during their first day of trading in the Dow Jones Industrial Average.
Investors haven't quite known what to make of Alphabet stock in June. Shares have gone from AI loser to winner and back again as investors fret about higher interest rates and hyperscalers' aggressive AI spending plans.
After hitting record highs of more than $400 in the first half of May, Alphabet stock is down about 7% in June. As of Monday's close, about $315 billion in market value had been wiped out since the beginning of the month, according to Dow Jones Market Data. However, shares remain up around 14% this year.
Nowak wrote Monday that Alphabet stock has declined as "investors dollars continue to flow" toward hardware and semiconductor plays.
"But we argue fundamentals and visibility into 2027 and 2028 are improving creating a tactical buying opportunity for one of the best positioned AI companies around," Nowak said.
Write to Kit Norton at kit.norton@barrons.com
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