Google Cloud "allies" with OpenAI to support computing power "ammunition," Morgan Stanley is bullish on long-term potential and gives an "overweight" rating

According to Zhitong Finance APP, Google Cloud (GOOGL.US) has reached an agreement with OpenAI to support increased computing power to meet the growing computational demands. Morgan Stanley released a related commentary report on this event, stating that if the agreement is confirmed, it will indicate Google's confidence in its long-term search business position and accelerate the development of Google Cloud, with a valuation reaching over 18 times. The firm has given Google an "Overweight" rating and raised the target price to $185.

Morgan Stanley believes that if the agreement between Google Cloud (GCP) and OpenAI is confirmed, its significance lies in two aspects: 1) Although the terms are unknown, the firm believes that OpenAI's inference demand is rapidly growing. If this collaboration accelerates the development of Google Cloud, its valuation could exceed 18 times the earnings per share by 2026. 2) Computing power is a competitive advantage, indicating Google's confidence in its long-term search business position.

Reports indicate that Google Cloud and OpenAI finalized the agreement in May, with OpenAI using Google Cloud to increase computing power to meet its growing computational needs. If this collaboration is confirmed, it means that OpenAI is continuing to diversify its infrastructure base, having previously had a "exclusive" partnership with Microsoft, and earlier this year, OpenAI signed an agreement with CoreWeave (CRWV.US) and also collaborated with Oracle (ORCL.US) last year.

The firm has not seen a clear report mentioning whether OpenAI will use TPU or GPU, but believes it is more likely to rely on Google's GPU to meet its computing needs.

Morgan Stanley's logic is: By using GPUs, OpenAI can maintain consistency in its infrastructure base, avoid vendor lock-in, and not require engineers to familiarize themselves with new chip architectures. If OpenAI does use TPU, it would further highlight the advantages of Google's differentiated technology products.

The firm states that for Google, the two important reasons for this collaboration are as follows:

1. It could become a driving force for the accelerated growth of Google Cloud, a potential that has not yet been fully recognized by the market.

For Google Cloud's business, adding OpenAI, a leading AI company, as a client is a significant or materially meaningful victory. Although Google Cloud's annual revenue is approaching $50 billion, with growth rates maintained at over 20% to over 30% in the past two years, it has not shown sustained market share growth compared to larger competitors AWS and Azure.

Although the terms and scale of this potential collaboration have not been disclosed, as the demand for computing power in the generative AI inference phase continues to grow, OpenAI is likely to require increasingly more computing resources.

In a previous report, analysts Keith Weiss and the U.S. software team discussed the importance of OpenAI to Azure (which is much larger than Google Cloud), believing that OpenAI is expected to be a key factor driving the growth of Google Cloud.

Earlier this year, OpenAI signed a $11.9 billion agreement with CoreWeave, which included a $350 million equity subscription, and recently added $4 billion to expand the collaboration. As Google Cloud's computing power limitations ease in the second half of the year, this collaboration could become a driving force for faster and more sustainable growth for Google Cloud Currently, the bank believes that Google's stock price has not yet reflected its valuation potential based on an estimated 18 times earnings per share (EPS) for 2026.

1. Important signals regarding Google's confidence in its long-term search business position

The debate among investors about Google's long-term search business position remains central, with the most common question being when or if GPT will disrupt it. The bank holds an optimistic view, citing Google's leading user base, data sets, continuously improving pace of innovation, and its still strong position at the top of traffic entry points.

Furthermore, the bank believes that this cooperation will be an important signal of Google's internal confidence in its long-term search position. In short, if we assume that computing power will become a competitive advantage for scaling high-intensity generative AI products to hundreds of millions of people, would Google agree to provide cloud services to ChatGPT if it were concerned that its "cash cow" search business faced the risk of disruption? The bank believes it is unlikely. After all, Google knows the health of its business better than any outsider.

It is worth noting that the bank still believes that Meta (META.US) poses a more structural threat to Google Search than OpenAI, although Meta's AI needs to achieve substantial breakthroughs in driving business outcomes to disrupt Google