Morgan Stanley Raises Alphabet's Target Price to $415, Bullish on 2028 Compute Capacity, TPU Sales, and Cloud Profit Release

Overview

This is a Morgan Stanley company research report on Alphabet Inc. (GOOGL.O), focusing primarily on AI compute supply in 2028, Google Cloud capacity monetization, external sales of 1P TPUs, and the resulting upward revisions to revenue, EBIT, EPS, and valuation. The report believes that although GOOGL has recently underperformed due to fund flows into hardware and semiconductors, visibility into its 2027/2028 fundamentals is improving, making the current pullback a tactical buying opportunity.

Core views

The report's core view is that GOOGL is becoming a major beneficiary of AI compute and cloud-business profit release. Morgan Stanley expects GOOGL to add approximately 9 GW of in-house compute capacity in 2028, including approximately 7 GW of TPUs, and sell approximately 4 GW of 1P TPUs to external customers. Based on higher assumptions for Google Cloud growth, TPU sales, and Search growth, the report raises its 2027/2028 revenue and EPS forecasts and increases the target price to $415. In valuation terms, the $415 target price applies approximately 23x P/E to average 2027/2028 EPS of approximately $16/$19, representing a premium of approximately 25% to the peer PEG median.

Analysis framework

The report uses a bottom-up framework covering compute capacity, revenue per watt, TPU sales, and capex to revalue Google Cloud and the company's overall earnings. The analysis first estimates the TPU capacity supplied to GOOGL by AVGO and MediaTek, then separates GOOGL's internal use from externally sold compute capacity, and subsequently estimates core Google Cloud revenue, 1P TPU revenue, cloud EBIT, company EPS, and the target valuation. The report also assesses the stock's risk/reward through bull, base, and bear cases.

Methodology notes

• Valuation methodologyP/E valuation and peer PEG comparison

  The target price is based on average 2027/2028 EPS and a target P/E multiple

  Morgan Stanley's $415 target price applies approximately 23x P/E to average 2027/2028 EPS of approximately $16/$19, implying a PEG of approximately 1.4x and a premium of approximately 25% to the GOOGL peer median.

• Capacity estimationASIC revenue-per-watt framework

  Using AVGO revenue and ASIC revenue per watt to estimate 2028 TPU shipment capacity

  The report applies an ASIC revenue framework of approximately $12/W to AVGO's estimated 2028 revenue, implying approximately 14 GW of total compute shipments, of which approximately 60%, or approximately 9 GW, would be TPUs.

• Cloud monetizationCloud revenue-per-watt framework

  Using revenue per watt to estimate core Google Cloud revenue

  The base case assumes incremental core Google Cloud revenue monetization of $15/$18 per watt in 2027/2028, corresponding to core Google Cloud revenue of approximately $152bn/$229bn.

• TPU sales estimation1P TPU revenue-per-GW framework

  Using revenue per GW to estimate external TPU system sales

  The report assumes approximately 20% gross margins on 1P TPU system sales and implies revenue of approximately $20bn per GW, forecasting 1P TPU sales revenue of approximately $62bn/$79bn in 2027/2028.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Alphabet Inc. / GOOGL.O

  Core covered asset

  Strengths

  AI-driven innovation in Search, YouTube, and Cloud; accelerating Google Cloud growth; strategic value of the TPU architecture in the AI data-center ecosystem; operating leverage from cost discipline.

  Weaknesses

  Significantly higher capital expenditure requirements, with the 2027 capex forecast raised to $350bn; AI products may bring higher compute intensity and margin pressure.

  Comparison

  According to the report, GOOGL trades at approximately 18x 2028 EPS, below its approximately 21x long-term NTM average; the target price implies a premium of approximately 25% to the peer PEG median.

  Risks

  A slowdown in the advertising cycle, weaker-than-expected Search growth, insufficient AI product monetization, lower-than-expected cloud and TPU capacity monetization, and capex exceeding expectations.

• Google Cloud

  Primary source of growth and earnings upgrades

  Strengths

  Revenue is expected to grow 106%/44% in 2027/2028, reaching approximately $308bn in 2028, with EBIT of approximately $132bn.

  Weaknesses

  Capacity monetization assumptions remain debatable and depend on revenue per watt, customer demand, and execution capability.

  Comparison

  The report believes Google Cloud will become an important component of GOOGL's diversified AI EBIT engine, accounting for approximately 46% of company EBIT in 2028.

  Risks

  Cloud demand, pricing, utilization, gross margins, and customer contract execution falling short of expectations.

• AVGO

  TPU/ASIC supply-chain participant

  Strengths

  Morgan Stanley's semiconductor team expects AVGO to ship approximately 14 GW of total compute capacity in 2028; the estimate of GOOGL-related TPU capacity is partly based on this forecast.

  Weaknesses

  GOOGL's 1P TPU sales carry low gross margins, with a significant portion of COGS ultimately flowing to AVGO.

  Comparison

  The AVGO TPU architecture is used to estimate GOOGL's TPU capacity and capex, while MediaTek TPUs may offer lower costs.

  Risks

  Changes in the ASIC revenue-per-watt assumption, shipment cadence, or supply-chain relationships could affect GOOGL's capacity and capex estimates.

• NVDA GPUs

  Supplementary source of GOOGL's incremental compute capacity in 2028

  Strengths

  The report expects GOOGL to add approximately 2 GW of NVDA GPU compute capacity in 2028, supplementing in-house compute capacity beyond TPUs.

  Weaknesses

  GPU capital intensity is high and may increase capex and depreciation pressure.

  Comparison

  TPUs remain the primary source of GOOGL's incremental compute capacity in 2028 in the report.

  Risks

  GPU supply, pricing, and data-center construction timelines could affect capacity deployment.

Key data

• Target price change$375.00 -> $415.00The report raises Alphabet's target price while maintaining its Overweight rating.
• Current share price$353.65The table discloses this as the closing price on June 29, 2026.
• Implied upside~20%Based on the $415 target price and the current share price disclosed in the report.
• Incremental compute capacity in 2028~9 GWApproximately 7 GW would be TPUs, with an additional approximately 2 GW of NVDA GPU compute capacity.
• External 1P TPU sales in 2028~4 GWThe report expects GOOGL to retain approximately 5 GW of AVGO TPU capacity for its own businesses and cloud workloads, leaving approximately 4 GW for external customer sales.
• Google Cloud revenue in 2028~$308bnThe report expects Google Cloud revenue to grow 106%/44% in 2027/2028.
• Google Cloud EBIT in 2028$132bnApproximately 46% of the company's total EBIT.
• 2027 capex forecast$350bnRaised from the previous $300bn, reflecting higher TPU- and capacity-related capital expenditure.
• 2028 EPS forecast~$19The report raises its 2027/2028 EPS forecasts by 4%/1%.

Impact & implications

The investment implication is that the market may be underestimating GOOGL's medium-term contribution from AI compute, the TPU ecosystem, and Google Cloud profitability. If Google Cloud revenue and EBIT materialize along the report's projected path, GOOGL's business mix will shift further toward a high-growth AI cloud platform, potentially supporting an upward re-rating of valuation multiples. In the short term, fund flows from software/internet stocks into hardware/semiconductors have pressured the share price, but the report views this as a divergence from improving fundamentals and a buying window.

Risks

• Global advertising growth slows further, particularly as SMB- and travel-related advertising comes under pressure in a recessionary environment.
• Search advertising growth falls short of expectations, with AI products cannibalizing core Search or failing to monetize sufficiently.
• New AI products create margin pressure because of lower monetization rates and higher compute intensity.
• Cost discipline fails to materialize, resulting in lower-than-expected margin expansion and EPS.
• Google Cloud capacity monetization, 1P TPU sales margins, or customer demand fall short of model assumptions.
• Higher-than-expected capex, data-center leasing, and depreciation pressure weaken free cash flow and valuation.
• Regulatory, competitive, and investment-banking business-conflict disclosures may affect investors' assessment of research independence.

What to watch

• GOOGL's incremental rack-power capacity and TPU deployment progress in 2027/2028.
• Google Cloud bookings, backlog, revenue growth, and EBIT margin delivery.
• Disclosure of external 1P TPU sales contracts, revenue per GW, margins, and customer mix.
• Whether 2027 capex approaches $350bn and 2028 capex approaches $375bn.
• Engagement, monetization, and impact on core advertising from Search, YouTube, and new AI products.
• Changes in fund flows and valuation differentials between GOOGL and hardware, semiconductor, and large internet peers.