Morgan Stanley Upgrades Google, Stamps $820 Price Target On Stock

Morgan Stanley's Brian Nowak upgraded Google Inc GOOG to Overweight and indicated that the stock has nearly 20 percent upside from Tuesday's closing price to $820.

Nowak said that not only is visibility into the core Google important, but it will also "will increase accountability and sharpen long-term capital discipline" in Google's investment projects. That will "lead to "higher overall EBITDA and cash flow."

Nowak pointed to a 13 to 18 percent multiple expansion in Expedia Inc EXPE and Amazon.com, Inc. AMZN following increased transparency as evidence that Google will also see similar gains.

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Morgan Stanley valued the core Google business at $971 per share, with a negative impact of $151 per share coming from losses in Alphabet investment projects of $8 to $9 billion annually. At that valuation, Google would trade at 22.4x its expected 2016 EPS, a slight premium to the 18x historical EPS it has tended to trade.

Nowak said that the firm is encouraged by "momentum at YouTube," leading the firm to model revenue growth of 18 percent annually over the next three years.

Morgan Stanley warned that a risk to its thesis is that the increased disclosure "could underwhelm investors if core Google earnings power is less than expected" or the Alphabet projects' losses erode "company-wide earnings power and cash flow."

Year-to-date, Google is 25.5 percent higher as the company is approaching an all-time high of $678.64. That level was first hit in mid-July before the stock slid 7 percent by the end of the month.