- Morgan Stanley’s July 6 report lists major companies that will benefit from GenAI.
- These 37 companies are expected to grow earnings per share by an average of 24% over the next three years.
- These stocks have seen significant gains and are expected to continue to rise over the next five to 10 years.
The S&P 500 index is up more than 15% year-to-date. But not all stocks contributed equally to this year’s impressive rally.
A Goldman Sachs document released on June 30 shows that the gains in the S&P 500 Index are attributed to seven mega-cap tech companies, which are included in the index, with a combined return of 58% this year. The other 493 stocks returned just 5%.
The hype surrounding artificial intelligence fueled the rally as expectations of artificial intelligence outweighed investors’ recession fears. So far this year, tech companies such as Nvidia (NVDA) and Microsoft (MSFT) are already up 196.26% and he 37.52% respectively, boosting the rest of the market.
Those who didn’t get the AI memo may feel they missed the rally of a lifetime. But a July 6 report led by Morgan Stanley equity analyst Sean Kim noted that the opportunity to profit from the AI revolution isn’t over yet, and in fact may be just beginning.
How to invest in the AI boom
Companies already exposed to AI have surged to the top of the market this year, but Morgan Stanley believes advances in AI technology will create new market leaders in the coming years, especially in the semiconductor market.
“We expect the benefits of AI to gradually emerge over the next decade. Hardware and semiconductors have significant exposure to AI today, but its pervasiveness in infrastructure/devices will slow it down over time. As that value changes over time, so will leadership,” Kim wrote. “As with previous technology paradigm shifts, we expect the third wave to come much later, from companies that can create usable applications on top of this infrastructure.”
According to the report, the total addressable market for AI technology is expected to triple from $90 billion to $275 billion over the next four years.
An investment bank has identified 37 companies that are positioned to benefit from that increased demand. And while many of these companies have already experienced their fair share gains in the past 12 months, Kim believes it’s still early days, not AI stocks in a bubble. I have brushed off the concerns.
“The market will inevitably compare AI to the dotcom boom. But today’s big AI companies (for the most part) have good cash flow characteristics, unlike many of the small businesses that were wiped out by the dotcom collapse. It lacked a viable business case,” he wrote.
Generative AI (algorithms that can create new content) opens the door to endless use cases that require new infrastructure. This is expected to drive continued sales and revenue growth within the industry over the next 5-10 years, directly benefitting the AI leaders identified by Morgan Stanley.
In fact, according to Wall Street consensus, average earnings per share for these stocks are expected to grow by 24% over the next three years, or double that of global stocks.
Below are 37 leading providers of AI technology in various fields. These include primary beneficiaries, companies that provide memory, data storage, computing and networking equipment, as well as secondary beneficiaries such as suppliers of advanced packaging, semi-cap equipment and power supplies.
Each stock includes its category, a Morgan Stanley price target denominated in local currency, and an Overweight or Underweight rating by Morgan Stanley analysts.
