We recently published a list of 10 stocks that will benefit from AI. In this article, we’ll look at where Microsoft Corporation (NASDAQ: MSFT) stacks up to other stocks that will benefit from AI.
Artificial intelligence has been the driving theme of the stock market over the past two years, which has seen investors struggle with inflation and high interest rates. Since OpenAI made ChatGPT public in November 2022 and NVIDIA CEO Jensen Huang predicted next year that a trillion-dollar market was at stake when it came to upgrading traditional computer hardware towards accelerated computing, the stock market has seen no respite.
However, when it comes to AI stocks, not all of them have thrived. Besides Huang’s company, the world’s leading designer of graphics processing units (GPUs), the shares of OpenAI’s biggest backer, the company known for the Windows operating system, were two of the most major initial beneficiaries of AI. Between December 2022 and H1 2024, their shares gained 631% and 75%, respectively. Other tech stocks also rode the AI wave and saw gains of between 42% and 308%. Of these, the stock that gained 308% was parent company Facebook and the focus on GPU investments and the success of the Llama open source model caught the attention of investors.
These companies recorded gains mainly because the AI wave, as analysts point out, is only just beginning. This stage is characterized by investor interest in companies that enable AI. However, the next stage of AI investing could see investors broadening their horizons. Some of this diversification away from technology stocks has already taken place in the form of an impressive performance of utility stocks in 2024. Their performance is evident through the utilities component of the flagship S&P index which gained 28 % from the beginning of the year to the end of the year. November, as it topped the benchmark index by one percentage point.
We have analyzed this stage of AI investment in great detail as part of our coverage of Goldman Sachs’ Best Phase 2 AI Stocks: Top 24 High-Conviction AI Stocks. Stocks on this list range from utility companies to computer hardware providers to semiconductor companies to glass companies. In this list, data center hardware companies were quite common, and as you read below you’ll find out why they could be the biggest beneficiaries of the next wave of AI investments.
Wells Fargo has extensively covered the topic of what other stocks, aside from the world’s most valuable, can benefit from artificial intelligence. His research covers companies that benefit from AI spending and applications. Moving on from actions that could benefit from AI spending, the bank notes that these will primarily include areas where money comes from spending on AI data. By 2025, it is estimated that hyperscaler cloud providers’ capital expenditures could be around $180 billion. This represents more than double the spending expected by the oil majors, estimated at nearly $85 billion.
So where will this money go? Well, W.F. believes that while “the majority of costs involved in building data centers relate to graphics processing units (GPUs) and the supercomputers that contain them,” other areas that should not be ignored include “cabling; steel racks; cooling (liquid and air); electricity”. equipment (both inside and outside the box); and backup generators” as well as others that “are necessary to lay the foundation and power generation to support the facility.” While listing the usual culprits of information technology, service communications and software which are part of the discretionary stocks as beneficiaries of data center spending, WF also adds two other sectors These are industrial and material values, because the bank believes that even if a “data center does not is maybe not a factory, if he walks like a duck and quacks like a duck, he could be a duck.”
He cites research that says that because up to 45 percent of the cost of building a data center “is tied to the land, building envelope, and basic building layout,” companies that ” supply steel, aggregates, cement and hydraulic equipment” and, by extension, construction and engineering companies as well as large non-residential construction suppliers (such as industrial distributors) can benefit from the 180 billion dollars of estimated capital expenditures for hyperscalers. WF adds that data center spending will also include electrical and HVAC systems, as it notes that this sector can benefit from the fact that “there are a relatively limited number of large-scale suppliers of large electrical equipment, HVAC systems commercial and diesel generators.
A development team working together to create the next version of Windows.
To compile our list of stocks that will benefit from AI, we have ranked the stocks that are part of our list of Goldman Sachs’ Best Phase 2 AI Stocks: Top 24 High-Conviction AI Stocks and ranked them based on the number of hedge funds that had purchased the stocks in the third quarter of 2024. This improves the list since it was released when the latest hedge fund data was not available and narrows down the list of stocks to the main favorites of the funds.
Why are we interested in stocks that hedge funds are piling into? The reason is simple: our research has shown that we can outperform the market by imitating the stocks selected by the best hedge funds. Our quarterly newsletter strategy selects 14 small- and large-cap stocks each quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here).
Number of hedge fund holders in the third quarter of 2024: 279
Microsoft Corporation (NASDAQ: MSFT) is a mega-technology company known for its Windows operating system and Azure cloud computing platform. It is also one of the most important players in the artificial intelligence sector thanks to its investment in OpenAI. OpenAI is widely considered an industry leader in AI software, but for Microsoft Corporation (NASDAQ: MSFT), the company’s pitch hinges on its ability to monetize its AI investments by generating profits. The focus is on its Azure business, through which it must offer AI services to businesses and generate enough profits to satiate investors who are already wary of the billions it has invested in AI. Since its July peak, shares of Microsoft Corporation (NASDAQ: MSFT) have lost 6.5% as Wall Street cautiously evaluates the business case for its AI products and services.
“Microsoft Company (NASDAQ:MSFT) came under pressure during the quarter as investors worried about increased investment as Microsoft invests heavily in the booming generative AI market. Investors are concerned about the company’s growing capital intensity and the uncertain return on that investment. We continue to believe that Microsoft is in a strong competitive and strategic position and poised to capture market share as businesses large and small navigate a digital-first landscape and adopt enterprise-class tools. AI-based generative productivity. The company’s dominant presence in the enterprise space, combined with its comprehensive product portfolio spanning Infrastructure as a Service (IaaS), Platform as a Service (PaaS), and Software as a Service (SaaS), makes it a crucial provider of IT solutions for businesses of all sizes. Microsoft is effectively executing its strategy in a large market by providing a roadmap for digital transformation and the adoption of cutting-edge AI-based solutions, such as ChatGPT and its Copilot suite of applications, that improve productivity and reduce costs. Therefore, we expect Microsoft’s solutions to demonstrate resilience even in a more challenging macroeconomic environment, supporting low double-digit growth in intrinsic value within our investment horizon.
Overall, MSFT ranks 2nd on our list of stocks that will benefit from AI. While we recognize the potential of MSFT as an investment, our conviction lies in the belief that AI stocks have more promise in terms of higher returns and in a shorter time frame. If you’re looking for an AI stock that’s more promising than MSFT but trades at less than 5x earnings, check out our report on cheapest AI stock.
