Morgan Stanley highlighted in its latest research that four pivotal generative AI (GenAI) catalysts—model advancement, agentic experiences, capital expenditures, and custom semiconductors—are fundamentally transforming the internet industry landscape.

According to Morgan Stanley analyst Brian Nowak's September 16 research note, continuous breakthroughs in leading AI models and the proliferation of "agentic" AI experiences designed to automate tasks are propelling the industry into a new growth phase. These technological advances will not only enhance user experiences but also further accelerate the digitization of consumer spending.

To support this technological revolution, tech giants are investing at unprecedented scales. The firm forecasts that combined capital expenditures from six major technology companies will reach approximately $505 billion in 2026, rising further to $586 billion in 2027. While this will pressure companies' free cash flow, it establishes the foundation for future growth.

Based on analysis of these trends, Morgan Stanley has established its preference ranking for large-cap tech stocks over the next 12 months, prioritizing Amazon.com, Meta Platforms, Inc., and Alphabet respectively. The firm believes these three companies possess the capability to leverage AI catalysts to strengthen their market positions and generate new revenue streams.

**Four Macro AI Catalysts**

Morgan Stanley identifies four macro AI forces that will primarily drive internet industry performance in coming years:

**Accelerated Model Development**: The research anticipates that leading AI models will continue, and potentially accelerate, improvements. Abundant capital, continuously advancing chip computing power, and substantial room for development in agentic capabilities will drive companies like OpenAI, Alphabet, and Meta Platforms, Inc. to release next-generation, more powerful models.

**Proliferation of Agentic Experiences**: Agentic AI products capable of delivering more personalized, interactive, and comprehensive consumer experiences will further promote digitization of consumer wallets. Achieving large-scale deployment still requires overcoming barriers in computing capacity, inference capabilities, and transaction process fluidity.

**Capital Expenditure Surge**: The report projects that by 2026, total data center capital expenditures from six giants (Amazon.com, Alphabet, Meta Platforms, Inc., Microsoft, Oracle, CoreWeave) will reach $505 billion, representing 24% year-over-year growth. The firm notes that constructing each gigawatt (GW)-scale data center still requires approximately $40-50 billion in capital expenditure.

**Increased Importance of Custom Chips**: The research suggests growing likelihood that third-party companies will test and adopt custom ASIC chips like Alphabet's TPU and Amazon.com's Trainium. Despite barriers created by NVIDIA's software ecosystem, cost-effectiveness and capacity constraints will drive customers to seek ASIC solutions, particularly for inference workloads. Morgan Stanley notes that progress by Alphabet and Amazon.com in this area would represent complete upside beyond their current valuations.

**Capital Expenditure Surge Pressures Free Cash Flow**

Massive capital expenditures represent tech giants' heavy bets on AI's future, but directly impact their financial positions. Morgan Stanley's models show that from 2024 to 2027, capital expenditures from six major tech giants are projected to grow at a 34% compound annual growth rate.

The research calculates that investments of this scale will significantly affect companies' free cash flow. By 2026, infrastructure capital expenditures for Alphabet, Meta Platforms, Inc., and Amazon.com are projected to represent approximately 57%, 73%, and 78% of their respective pre-tax free cash flow (FCF). This indicates these companies' willingness to sacrifice short-term profitability in exchange for long-term technological and market advantages to maintain leadership in the AI race.

**Amazon.com: AWS Acceleration and Retail Margin Improvement**

Amazon.com is Morgan Stanley's top pick among large-cap tech stocks, with a $300 price target and "Overweight" rating. The bullish thesis rests on two main pillars: AWS business re-acceleration and continued North American retail business margin improvement.

For AWS, the report analyzes its data center construction pace, anticipating substantial new data center space additions in 2025 and 2026, providing physical foundation for achieving 20%+ revenue growth in 2026, above the firm's current 19% base forecast.

Regarding retail operations, the research indicates Amazon.com's North American retail business margins have significant room for improvement. As of Q2 2025, this business segment's margin stood at -1%, well below the approximately 1% level from 2018. Morgan Stanley's base model projects recovery to 2018 levels only by 2028, suggesting potential for further upward revisions to 2026/2027 earnings per share forecasts.

**Meta Platforms, Inc.: Core Business Improvements and "Call Options"**

Morgan Stanley maintains an "Overweight" rating on Meta Platforms, Inc. with an $850 price target. The firm believes investors should focus on core platform improvements, next-generation Llama model releases, and multiple underpriced "call options."

The report states that Meta Platforms, Inc.'s use of GPUs to drive core advertising business improvements still offers enormous room to enhance user engagement and monetization capabilities. Simultaneously, markets anticipate the company will release a thoroughly tested and improved next-generation Llama model in early 2026.

Additionally, new businesses like Meta AI search and Business Messaging represent important long-term growth drivers. Morgan Stanley calculates that Meta AI search alone could create approximately $22 billion in annual revenue opportunity by 2028. Survey data also shows that despite Meta AI's later launch, its user adoption rates have rapidly matched ChatGPT and Alphabet's Gemini.

**Alphabet: Search Innovation and Cloud Growth Prospects**

Morgan Stanley maintains an "Overweight" rating on Alphabet with a $210 price target. The firm focuses on three core issues: AI-driven search growth, potential shifts in user commercial behavior, and Google Cloud Platform (GCP) growth.

The research indicates that Alphabet's innovations in AI Overviews, AI Mode, and other areas should drive accelerated search revenue growth, with predictions of 12% and 9% search revenue growth rates for H2 2025 and 2026 respectively. Morgan Stanley's survey data shows that for commercial behaviors like product research and price comparison, Alphabet remains consumers' preferred platform, leading Amazon.com and other competitors.

In cloud business, Alphabet's Gemini models and TPU chips are viewed as key drivers for GCP growth. The report mentions that companies like Meta Platforms, Inc. have signed cooperation agreements with GCP, potentially contributing approximately 300 basis points to Alphabet's 2026 cloud business growth. The firm believes markets have not fully priced Alphabet's advantages in custom chips, constituting a potential upside catalyst.