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The leading U.S. cloud and search company, Alphabet (GOOG) (GOOGL), has seen incredible price appreciation in recent years as investors and the market as a whole latch on to the idea that this mega-cap company has the potential to continue to grow at market-beating rates for the foreseeable future. For a company of its size, that shouldn't typically be possible (growth tends to tail off the larger a company gets). However, with the rise of AI and other productivity-enhancing technologies, the expectation is that Alphabet and the advertising revenue it garners from its dominant position in the online advertising realm could actually accelerate moving forward. The thing is, that's not where some analysts are focusing their attention right now. Indeed, an analyst note from Morgan Stanley this week suggests that Alphabet's cloud business is the key diamond investors should be paying attention to. Analysts at the investment bank believe that Google Cloud could grow more than 50% next year. Let's dive into what to make of this prediction and what is driving this marked upgrade for the Magnificent Seven stock. The Assumptions Add Up Analysts at Morgan Stanley have modeled a scenario in which Alphabet sees its on-demand business growing by 15% (potentially more), with an additional $50 billion likely to be seen in net backlog over the course of next year. If those two factors do play out, this is a company that could see its cloud revenue growth rate double from 25% in 2025 (it was 29% and 37%, respectively, in 2023 and 2024). Indeed, that's likely not too big of an improvement over and above 2024 numbers, and it's an acceleration that could play out if the company's AI integrations play out as many analysts and experts believe will be the case. From a fundamentals perspective, I continue to think GOOG stock is the most attractive of its Magnificent Seven peers at the moment. The chart above highlights what I'm talking about - the company's forward price/earnings ratio is high, but it's right around where the market multiple is at the moment. And with a price/cash flow right around 30, that means investors are getting a free cash flow yield of around 3.3% on this growth stock (which could actually grow faster than previously thought). From a margin perspective, return on assets and equity perspective, and most other key metrics that play into the strength of Alphabet's balance sheet, this is a world-class company with a rock-solid balance sheet. It should be no surprise that most analysts are taking the bullish side of the wager when it comes to GOOG stock. What Does Wall Street Think? Of the 56 analysts covering Alphabet, the vast majority rate the company a “Strong Buy” for the reasons mentioned previously. The consensus price target of $311.06 per share on GOOG stock implies upside of around 9% from here for investors putting fresh capital to work. Now, that's certainly not bad, and I'm thinking most investors would take such a return over the next 12 months (which would be around 10%, including the company's small dividend yield). Of course, there are plenty of valuation concerns surrounding not only Alphabet but the entire mega-cap tech grouping that ought to be considered. I have my own trepidations on this front. But as far as this group is concerned, Alphabet's valuation and its strong fundamentals make this stock one I would feel most comfortable owning right now.
