Alphabet (GOOG +5.10%) (GOOGL +5.38%) stock jumped 5.1% through 12:55 p.m. ET Monday after analysts at Morgan Stanley reassured investors about the company's prospects amid record levels of investment in AI infrastructure.
Image source: Alphabet.
Alphabet Q2 earnings
Alphabet reported strong earnings last week, beating expectations with profits of $9.11 per share -- triple what analysts expected. Surprisingly, Alphabet stock sold off after the report and, in fact, continued to trade below its pre-earnings price all the way through Friday.
Earnings beat notwithstanding, investors were spooked by Alphabet's announcement that it was doubling down on AI spending and raising its forecast for capital investment this year to a mind-bending $195 billion to $205 billion.
NASDAQ: GOOG
Key Data Points
What Morgan Stanley said about Alphabet's spending
But according to Morgan Stanley -- that's OK.
All four of the big AI hyperscalers are spending gobs of money on AI investment. Amazon (AMZN +4.89%) is spending even more than Alphabet -- $220 billion from $200 billion -- while Meta (META +6.50%) has a $130 billion to $145 billion budget, and Microsoft (MSFT +5.15%) is spending about $190 billion.
Total cloud capital expenditure in 2027 could exceed $1.2 trillion this year, says MS. But all this investment is driving huge cloud revenue growth, with Google Cloud Platform growing 82% year over year.
The best news, says the analyst, is that "strong operating cash flow, equity and debt financing, leasing strategies, custom chips, and infrastructure efficiencies are helping fund capex while easing free cash flow pressure," leaving Alphabet with still $53.3 billion in positive FCF over the past 12 months. For now, the analyst isn't worried about how much money Alphabet is spending.
Let's see if Morgan Stanley feels the same next year, when AI spending leaves Alphabet with a free cash flow loss.
