Three major technology firms released their earnings on the same night, with the explosive growth in cloud services prompting Wall Street to reassess the commercial returns of artificial intelligence. According to analysis from Morgan Stanley's Brian Nowak team on April 30, the revenue acceleration of hyperscale cloud providers is emerging as the most critical validation signal for generative AI's return on invested capital this year.
Google Cloud emerged as the biggest surprise of this earnings season. Its quarterly revenue surged 63% year-over-year, surpassing buyer expectations of 60%. This growth stemmed from two primary drivers: substantial quarter-over-quarter growth in paid monthly active users for Gemini Enterprise, with API processing exceeding 16 billion tokens per minute, and sustained strong demand for AI infrastructure, including continued sales of TPUs and GPUs to external customers.
More notably, Google Cloud's order backlog nearly doubled, jumping from $243 billion to $462 billion in a single quarter, a net increase of $219 billion. Morgan Stanley attributed this surge to large private lab contracts and Google's sales of TPU chips to third parties. The sale of TPUs to external clients represents a new variable. The firm estimates that TPU sales contributed between $20 billion and $100 billion to the quarterly backlog, with a base-case assumption around $55 billion. This indicates Google is evolving beyond a cloud service provider into a seller of computational hardware, a scenario previously considered a "bull case" that has now become the base assumption.
Financially, Morgan Stanley raised its revenue forecasts for Google Cloud by approximately 11% for 2026 and 40% for 2027, projecting growth rates of 78% and 86%, respectively. Longer-term, the firm projects Google Cloud's EBIT contribution will exceed 50% of the company's total by 2029, reaching 64% by 2030. Consequently, Morgan Stanley increased its price target for the stock from $330 to $375, maintaining an "Overweight" rating, based on a 24x P/E multiple on the raised 2027 EPS forecast of approximately $16.
Amazon Web Services reported 28% year-over-year growth, slightly below buyer expectations of about 30%, making it a relative underperformer in the reports. However, Morgan Stanley advised investors to look beyond the quarterly figure, noting that AWS accelerated by approximately 480 basis points from the previous quarter. More importantly, its order backlog increased by $120 billion to $364 billion, exceeding the firm's $350 billion forecast, driven by large private lab contracts and new business. Morgan Stanley projects AWS growth will further accelerate to 35% in 2026 and 36% in 2027 as capacity comes online.
Amazon's retail segment also outperformed, with North American Q1 EBIT approximately $1 billion above expectations, unit growth around 15% year-over-year (beating forecasts by 400 basis points), and fulfillment and shipping costs 2% below projections. Combining cloud and retail performance, Morgan Stanley raised its 2027 EPS estimate for Amazon by about 9% to $11.30 and increased its price target from $300 to $330, maintaining an "Overweight" rating.
The rapid cloud growth is underpinned by significant capital expenditure increases. Morgan Stanley now forecasts that the combined capex of the five major hyperscale cloud providers will reach approximately $800 billion in 2026 and exceed $1.1 trillion in 2027, up from a prior estimate of $950 billion. Specifically, Google raised its 2026 capex guidance by $5 billion, and Morgan Stanley projects the company's data center capex will hit $300 billion by 2027, with Amazon's reaching $225 billion. The strategy involves heavy upfront investment to build capacity, followed by revenue scaling and ROIC recovery, with the surging order backlogs providing direct evidence of this model's viability.
Meta's situation differs from its peers. While Q1 revenue of $56.31 billion slightly missed expectations of $56.76 billion, core advertising metrics showed continued improvement: Facebook video watch time grew over 8% quarter-over-quarter (the largest increase in four years), Instagram Reels watch time rose 10%, global ad pricing increased 12% year-over-year, and ad impressions grew 19%. Its adjusted EBITDA margin reached 62%, significantly exceeding the 56.3% forecast.
However, Morgan Stanley noted that Meta lacks a high-growth business like Google Cloud or AWS to directly demonstrate AI investment returns and has limited forward revenue visibility. Therefore, further stock revaluation depends on the commercial success of new AI-driven products and changes in user adoption and payment behavior. The firm also highlighted that internal memos indicate Meta plans to cut about 10% of its workforce and eliminate approximately 8% of open positions, with each 10% reduction potentially adding $0.50 to $1.50 to 2027 EPS. Morgan Stanley's base-case 2027 EPS estimate for Meta is approximately $34, with a $775 price target and an "Overweight" rating.
In terms of market dynamics, Google Cloud added $2.3 billion in quarterly revenue, surpassing AWS's $2.0 billion and Azure's $1.9 billion, marking the first time it led in quarterly revenue growth. The combined order backlog of the three major cloud providers now exceeds $1.5 trillion, signaling robust and sustained demand growth.
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