We recently published a list of 10 Stocks That Will Benefit From AI. In this article, we are going to take a look at where Microsoft Corporation (NASDAQ:MSFT) stands against other stocks that will benefit from AI.

Artificial intelligence has been the driving theme of the stock market over the past couple of years which have seen investors battle inflation and high interest rates. Ever since OpenAI publicly released ChatGPT in November 2022 and NVIDIA CEO Jensen Huang predicted the next year that there was a trillion-dollar market in play when it came to upgrading traditional computing hardware to accelerated computing, the stock market has seen no respite.

However, when it comes to AI stocks, not all of them have flourished. Apart from Huang’s firm, the world’s leading graphics processing unit (GPU) designer, shares of OpenAI’s biggest backer, i.e., the firm known for the Windows operating system, were two of the biggest initial AI beneficiaries. Between December 2022 and H1 2024, their shares have gained 631% and 75%, respectively. Other technology stocks have also ridden the AI wave and have posted gains ranging between 42% to 308%. Within these, the stock that has gained 308% is Facebook’s parent entity and its focus on GPU investments and success with the Llama open source model have caught investor attention.

These firms have primarily posted gains because the AI wave, as analysts would like to remind you, is in its early stages. This stage is characterized by investor interest in firms that are AI enablers. However, the next stage of AI investment could see investors broaden their horizons. Some of this diversification away from technology stocks has already taken place in the form of impressive performance by utility stocks in 2024. Their performance is evident through the utility component of the flagship S&P index gaining 28% from the start of the year to the end of November as it led the benchmark index by a percentage point.

We analyzed this stage in 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 in this list range from utility firms to computer hardware providers, semiconductor firms, and glass companies. Within this list, data center hardware firms were quite common, and as you read below, you’ll find out why they might be the biggest beneficiaries of the next wave in AI investment.

Wells Fargo has extensively covered the topic of what other stocks apart from the most valuable in the world can benefit from artificial intelligence. Its research covers firms that benefit from AI spending and applications. Starting from stocks that might benefit from AI spending, the bank notes that these will primarily include areas where the money trickles from AI data spending. In 2025, it estimates that hyperscaler cloud providers’ capital expenditures can sit around a cool $180 billion. This is more than twice the expected spending by oil majors, which is estimated to sit at close to $85 billion.

So where will this money trickle down to? Well, WF believes that while the “largest portion of cost involved in constructing data centers is graphics processing units (GPUs) and the supercomputers that contain them,” other sectors that should not be ignored include “cabling; steel racks; cooling (liquid and air); electrical equipment (both inside and outside the box); and backup generators” along with others that “are required to lay the foundation and power generation to support the facility.” While it lists down the usual culprits of information technology, communications services, and software firms that are part of discretionary stocks as the beneficiaries of data center spending, WF also adds two other sectors. These are industrial and material stocks, as the bank believes that while a “data center may not be a factory, but if it walks like a duck and quacks like a duck, it might be a duck.”

It quotes research to share that since as much as 45% of the cost of building a data center “is related to land, building shell, and basic building fit-out,” firms that “supply steel, aggregates, cement, and water equipment and, by extension, construction and engineering firms as well as broad non-residential construction suppliers (such as industrial distributors)” can benefit from the $180 billion in estimated hyperscaler capital expenditure. 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 scaled suppliers of large electrical equipment, commercial HVAC systems, and diesel generators.”

For some materials and industrial stocks, you can check out 10 Best Materials Stocks to Buy According to Hedge Funds and 20 Industrial Stocks Already Riding the AI Wave.

Our Methodology

To make our list of stocks that will benefit from AI, we ranked the stocks part of our list of Goldman Sachs’ Best Phase 2 AI Stocks: Top 24 High Conviction AI Stocks and ranked them by the number of hedge funds that had bought the shares in Q3 2024. This upgrades the list since it was published when the latest hedge fund data was unavailable and it narrows down the list of stocks to the top fund favorites.

Why are we interested in stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here).

Microsoft Corporation (NASDAQ:MSFT)

Number of Hedge Fund Holders In Q3 2024: 279

Microsoft Corporation (NASDAQ:MSFT) is the mega technology firm that is known for its Windows operating system and Azure cloud computing platform. It is also one of the most important players in the artificial intelligence industry owing to its investment in OpenAI. OpenAI is widely heralded as an AI software industry leader, but for Microsoft Corporation (NASDAQ:MSFT), the firm’s narrative depends on its ability to monetize its AI investments by generating profit. In focus is its Azure business through which it has to push AI services to businesses and earn enough profit to satiate investors who are already wary about the billions that it has invested in AI. Since their peak in July, Microsoft Corporation (NASDAQ:MSFT)’s shares have lost 6.5% as Wall Street cautiously evaluates the business case for its AI products and services.

Mar Vista Investment Partners mentioned Microsoft Corporation (NASDAQ:MSFT) in its Q3 2024 investor letter. Here is what the fund said:

“Microsoft Corporation (NASDAQ:MSFT) stock was pressured in the quarter as investors fretted over rising capex as Microsoft invests heavily in the burgeoning generative AI market. Investors are concerned about the rising capital intensity of the business and the uncertain return on that investment. We continue to believe that Microsoft occupies a strong competitive and strategic position and that it is poised to capture market share as businesses, both large and small, navigate the transition to a digital-first landscape and embrace generative AI-driven productivity tools. The company’s commanding presence in the enterprise arena, combined with its comprehensive product portfolio encompassing Infrastructure-as-a-Service (IaaS), Platform-as-a-Service (PaaS), and Software-as-a-Service (SaaS), establishes it as a crucial provider of IT solutions for companies of all scales. Microsoft is effectively executing its strategy in a sizable market by offering a roadmap for digital transformation and adoption of cutting-edge, AI-driven solutions, such as ChatGPT and its suite of Copilot applications, which enhance productivity and reduce costs. Consequently, we anticipate that Microsoft’s solutions should exhibit 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 acknowledge the potential of MSFT as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than MSFT but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

READ NEXT: 8 Best Wide Moat Stocks to Buy Now and 30 Most Important AI Stocks According to BlackRock.

Disclosure: None. This article is originally published at Insider Monkey.