Megatrends: How to Invest in the Artificial Intelligence (AI) Boom

Morgan Stanley Wealth Management Global Investment Office


Summary: Artificial intelligence is set to become a $3 trillion industry in the next several years. Where can investors find potential opportunities?

AI Boom

AI, and particularly generative AI, is currently one of the most disruptive forces in business, permeating virtually every sector of the economy and promising to usher in new levels of productivity. Morgan Stanley’s Global Investment Office sees AI as one of the most important investment themes of the next decade and estimates that it will rapidly grow to a $3 trillion industry in the next several years1.

“Generative AI” refers to unsupervised and semi-supervised machine learning algorithms that can use existing text, images, audio or video to create new content. Generative AI tools can, for example, have human-like conversations, compose music and edit computer code.

Where can investors find compelling AI opportunities? Thus far, many investors have focused on a handful of mega-cap tech stocks known as the “Magnificent 7” as the main beneficiaries of advances in AI. But given how wide-ranging AI’s impact will likely be, we believe there are far more companies that stand to benefit, across sectors ranging from Consumer Discretionary to Health Care and Financials. Here’s a look at the types of companies our strategists are watching.

Leaders may keep leading

Many of the economic benefits of AI are likely to accrue to companies that are already leading in their industries. Specifically, large firms with dominant market share, recurring revenues and “sticky” customers are positioned to use AI to help amplify their already considerable competitive advantages. These companies often have customers who cannot easily switch to rival products and thus may be more willing to try their AI product—and even pay more for it—because it is from a company they already know and trust. Companies that move quickly to integrate AI into their business models are more likely to avoid disruption and widen their lead.

Four types of AI leaders

Among these likely AI beneficiaries, investors may want to pay particular attention to companies that fit at least one of four categories.

1. Margin Expanders

These companies are using AI to reduce costs. Generative AI tools that help software companies write code, for example, may help them lower their often-sizable Research & Development costs and more rapidly introduce new products and features. Professional services companies are also using AI to realize savings: For example, one leading tax-services provider uses AI tools to help its accountants process significantly more returns in the same amount of time, without having to hire additional professionals.

2. Trailblazers

Companies in this category are rolling out new AI-powered products or services to boost sales or create new revenue streams—often targeting existing customers who may be reluctant to switch providers. There’s precedent for this strategy: Recall that in the 1990s, many people first tried web browsers from their existing operating-system vendor, and in the 2000s, customers tried video-streaming from their DVD delivery service. An example today is a leading online meal-delivery service that is developing a new generative-AI phone-answering system to take orders and make add-on suggestions. This helps increase order sizes, as well as reducing missed opportunities from the 20% of customers who say they would still prefer ordering by phone instead of online1.

3. Price Raisers

These industry leaders are introducing AI-based enhancements to justify charging more. They include a leading video-conferencing provider whose new AI “companion” will help users catch up on missed meetings by generating summaries. Similarly, a company that provides e-commerce tools for retailers has added generative-AI features to help clients write product descriptions or answer their operations questions, such as how to create a holiday sale. Such value-added features can make it easier for these companies to justify higher prices, particularly in industries where customer frustration has been growing over routine price hikes with minimal perceived improvements.

4. Input Suppliers

These companies provide the “building blocks” of AI technology, including data-management tools, data centers and the equipment needed for advanced chips manufacturing. As organizations add the computing capacity necessary for AI, global semiconductor companies are among the most likely beneficiaries, with surging demand for chips helping drive record profitability. But they are not the only ones. Investors may also want to watch select companies that provide the infrastructure and tools for businesses to develop or use AI, such as companies that specialize in data management for corporate IT departments and client-to-cloud networking services for data centers.

Mind the risks and be selective

While AI is likely to usher in long-term growth in many industries, investors should be mindful of a potential bubble in the near future. There have been recent hype cycles around some new technologies, such as cryptocurrency and work-from-home technology, that have fizzled out to some degree. It may take a while before investors see big productivity improvements from AI, and companies that overpromise could fare poorly.

There is also the risk that AI will reduce what economists call “efficient scale,” making it so inexpensive for smaller companies to compete that it effectively erases the size advantages enjoyed by larger players. Lastly, new regulations and legal battles over issues such as copyrights and intellectual property could smother AI development.

Investors should be selective. Pay particular attention to likely AI beneficiaries that are favored by equity analysts and sport comparatively low valuation multiples relative to how fast their earnings are growing.

A Morgan Stanley Financial Advisor can share specific investment recommendations aimed at capitalizing on AI’s growth potential.

1 The source of this article is “Building an AI Army”, an AlphaCurrents report by the Morgan Stanley Global Investment Office, was originally published October 20, 2023 by author Denny Galindo.

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