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Investing.com -- Morgan Stanley analysts view the reported agreement between Google Cloud and OpenAI as significant for two key reasons, signaling confidence in Alphabet (NASDAQ:GOOGL)’s long-term search position.
The firm highlights that Google Cloud’s potential partnership with OpenAI "is notable" for its implications for cloud acceleration and as a "signal of confidence from GOOGL about its LT search position."
The rumored deal, which would see OpenAI utilize Google Cloud for additional compute capacity, comes as OpenAI seeks to "diversify its infrastructure base away from MSFT."
While the specific chip architecture (TPUs or GPUs) remains unconfirmed, Morgan Stanley (NYSE:MS) believes it’s "more likely that they rely on GOOGL’s GPUs" for consistency, though using TPUs would be an even "further bullish signal for GOOGL’s differentiated tech offerings."
Firstly, the bank says the partnership could be a "potential driver of acceleration to Google Cloud, which GOOGL [is] not getting credit For."
“Adding a leading AI player as a customer is a significant and potentially material win for GOOGL’s cloud business," said Morgan Stanley.
They also expect OpenAI to "need increasingly more capacity as the inference stage of GenAI continues to unfold," suggesting this could be a "material driver of upside to GOOGL Cloud growth ahead."
Secondly, the agreement sends "important signaling about GOOGL’s confidence in its long-term search positioning," claims the bank.
“If we assume compute capacity is going to be a competitive advantage to scaling intensive GenAI enabled products to hundreds of millions of people, do we think GOOGL would agree to give ChatGPT access to GOOGL Cloud if they were concerned about disruption risk to the cash cow search business?,” questioned the bank.
They conclude that "GOOGL has better data on the health of its business than any of us do externally." Morgan Stanley reiterated its Overweight rating on Alphabet.