These companies are benefiting from the demand for AI cloud services and semiconductors.
By sticking with industry leaders who grow their sales and profits over many years, you can build wealth in the stock market. Some of the most promising opportunities right now are companies that are enabling the adoption of artificial intelligence (AI) across the economy.
Research of Morgan Stanley shows that we may still be in the early stages of this shift, with corporate spending on AI expected to grow to around $10 trillion in the current cycle. Here are two stocks that can help you take advantage of this opportunity.
Image source: Getty Images.
Microsoft
Millions of people use it Microsoft (MSFT +1.90%) software at home or at work, every day. This puts the company in a great position to generate revenue from AI features in its products. The company’s cloud segment is proof of this, with Microsoft Cloud revenue increasing 26% year over year last quarter. This shows that AI services are becoming a key driver of business growth.
Given what’s at stake, Microsoft is investing in data center capacity and AI chips, like the Maia 200 custom AI accelerator that powers the models behind Copilot. These investments should support growing demand for AI cloud services, with Azure enterprise platform revenue up 39% year-over-year last quarter.
It also integrates Copilot into high-end products that can command premium prices, such as Microsoft 365 and GitHub. With that strategy, it’s no surprise that productivity software and business process revenue rose 16% year-over-year last quarter, with management seeing an increasing contribution from Copilot demand.
Today’s change
(1.90%)$7.47
Current price
$401.14
Key data points
Market capitalization
$3.0T
Day range
$392.92 -$401.79
Range of 52 weeks
$344.79 -$555.45
Volume
54M
Avg. full
30M
Gross margin
68.59%
Dividend yield
0.85%
The stock’s price-to-earnings (P/E) ratio of 25 looks attractive for a company that consistently reports double-digit revenue and earnings growth. The ability to monetize AI investments with Copilot and Azure makes Microsoft a solid investment.
Broadcom
When you see companies like Microsoft investing more in data centers, that is good news Broadcom (AVGO +7.22%). Data centers need powerful networks to connect large clusters of chips, and Broadcom has been a major supplier of these components for years.
The company’s leadership in the industry is reflected in growing profits and high margins. Broadcom posted a 39% year-over-year increase in adjusted (non-GAAP) net income last quarter, to $9.7 billion. This represents a high margin on revenue of $18 billion in the quarter, which also grew 28% year over year. This growth was primarily driven by surging demand for Broadcom’s AI accelerators.
Today’s change
(7.22%)$22.41
Current price
$332.92
Key data points
Market capitalization
$1.6 tons
Day range
$316.30 -$335.00
Range of 52 weeks
$138.10 -$414.61
Volume
33M
Avg. full
31M
Gross margin
64.71%
Dividend yield
0.73%
Broadcom’s profitability also supports a shareholder-friendly cash return program through increasing dividend payments. Broadcom paid $2.8 billion in cash dividends in the fourth quarter, and has consistently increased its dividend over the past decade. Last year it paid out half of its trailing profits in dividends, bringing its current yield to 0.73%.
The stock looks expensive based on a declining price-to-earnings ratio, but that’s because Broadcom expects robust demand for its AI semiconductors. Analysts predict an annualized profit growth of 31% in the coming years. Based on this year’s consensus estimate, the forward price-to-earnings ratio of 32 seems reasonable and investors should be able to realize solid returns.
