Google's momentum surpasses Meta, with the outcome in 2026 depending on the capabilities of the next-generation models

Author: Long Yue

Source: Hard AI

In the latest earnings season, Morgan Stanley has judged the "highs and lows" of two AI giants.

Morgan Stanley's latest report believes that Google's parent company Alphabet, with its comprehensive and better-than-expected performance and strong profit upgrades, is expected to tactically surpass its competitor Meta.

The earnings report shows that all of Google's major revenue lines achieved better-than-expected growth, prompting the firm to raise its target price from $270 to $330. Analyst Brian Nowak pointed out in the report that Google's search business grew by 14.5% year-on-year, YouTube grew by 15%, while Google Cloud (GCP) stood out with a year-on-year growth rate of 34%. This strong performance led the firm to raise its earnings per share (EPS) forecast for Google for the fiscal years 2026 and 2027 by approximately 7% and 9%, respectively.

In contrast, Meta's performance was described as "tactically disappointing." Although the fundamentals of its core platform remain solid, the revenue guidance for the fourth quarter failed to boost market confidence, while the company's capital expenditures and operating costs on the "super intelligent team" and core products both increased. This raised market concerns about the uncertainty of return on invested capital (ROIC), leading Morgan Stanley to lower its EPS forecast for Meta for the fiscal years 2026 and 2027 by 5% and 4%, respectively, with the target price slightly decreasing from $850 to $820.

However, the final outcome of this competition is far from decided; the landscape in the coming years will depend on who can first launch a more groundbreaking next-generation AI model.

Google Cloud Business Explodes, Profit Outlook Positive

The biggest highlight of Google's performance this round comes from its cloud business. The report shows that Google's backlog orders surged by 46% quarter-on-quarter, increasing by approximately $49 billion, totaling $155 billion. Morgan Stanley speculates that this growth may partially account for orders from OpenAI and Meta for the first time.

In addition, the growth outlook for Google Cloud remains positive. The report mentions that the number of contracts exceeding $1 billion signed by Google this year has surpassed the total of the past two years, and it is expected to gain incremental revenue of $50 billion to $80 billion from the newly announced contract with Anthropic. Based on this, Morgan Stanley raised its revenue forecasts for Google Cloud for 2026 and 2027 by 9% and 13%, respectively, expecting its growth to remain strong.

Meta Increases Investment, Uncertainty in Returns Weighs on Expectations

In contrast to Google's optimistic outlook, Meta is facing a balancing act between increased investment and uncertain returns. The report points out that Meta's operating and capital expenditures are rising due to its investment in the "super intelligent team," which is the biggest driver of its capital expenditure increase year-on-year in 2026Despite strong core metrics such as user engagement on Facebook and Instagram, Meta's high investments have raised market concerns about its return on investment. Reports indicate that this uncertainty may put pressure on Meta's stock valuation or set a ceiling. It is these worries about costs and future returns that have led analysts to downgrade their earnings expectations.

Morgan Stanley emphasizes that in the current environment, upward revisions of earnings expectations are crucial for driving short-term stock performance.

In fact, we believe that earnings revisions and confidence in AI investment returns will be key in determining the stock performance and relative valuation of Google and Meta in 2026.

Next-Generation Models: Gemini 3 vs. Llama

Although the current earnings revisions give Google an edge, the report clearly states that the ability of their next-generation AI models will determine the long-term competitive positions and valuation multiples of both companies.

For Google, the next key catalyst is the anticipated release of Gemini 3 by the end of the year. The market will closely watch its next-generation capabilities in reasoning, diffusion, and agency functions, which will be an important step in solidifying its "GenAI leadership position."

For Meta, the real test will come in 2026, when its "super-intelligent team" needs to launch Llama reasoning or the next-generation cutting-edge model with leading and unique characteristics. The report emphasizes that whether Meta can "rebuild its leadership position in GenAI innovation" will be crucial for the market's willingness to assign it a certain valuation multiple.

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