Morgan Stanley’s guide to investing in AI as use of the technology spreads

Morgan Stanley is offering up alternative ways to play artificial intelligence beyond the usual tech “enablers” that have come to dominate investor attention. A report issued Tuesday entitled “15 Ways to Play AI” anticipates a “broadening out of the AI theme over the remainder of 2024 and into 2025” and notable AI adoption in areas such as gaming, education and biotechnology. The study, an outgrowth of Morgan Stanley’s technology, media and telecom investment conference last week, highlights “the Tech Diffusion theme from all angles and all geographies.” “We continue to favour stocks that are early Adopters but also those where our analysts see greatest change of productivity uplift,” analysts led by London-based Edward Stanley wrote. The bank views the broadening out of AI occurring in multiple phases, starting with “first-derivative” enablers such as Microsoft , Meta Platforms and popular semiconductor names, before transitioning into the “less crowded sub-themes.” Beneficiaries include companies that are poised to get a productivity boost from AI. Three areas — Smartphones and AI Edge, companies powering Generative AI and the so-called early adopters — drew special attention based on their upside potential relative to Morgan Stanley’s price target; growth versus valuation; stock performance to date; investor positioning and concentration risk; and expected “expansion in breadth” to mid-cap stocks from large-caps, according to the analysts. In the near term, Morgan Stanley views “the Smartphone supply chain as the least well-discounted and most catalyst-rich way to play the theme,” while longer term opportunities may emerge as PC/workstations enable the “growing Edge AI trend,” and robotics “play a major role in driving this sub-theme of AI over the remainder of the decade.” Companies providing the energy for data centers and meeting the need for greater energy efficiency should profit as energy use for these tools grows to 4% of total power consumption by 2035 from 1% today, while “early adopters” should experience the most significant productivity uptick, the analysts wrote. “We have argued both globally and more specifically in Europe, for investors to be positioned for more and upgraded data centre facilities to cope with the growing energy intensity of upcoming chips,” Stanley wrote. Against this backdrop, here are some of Morgan Stanley’s top picks as AI broadens out: Several popular technology stocks made the list alongside AI mainstays such as Nvidia , Microsoft and Alphabet . They include Apple , Chinese internet stock Baidu and Palantir Technologies . Apple shares have struggled year to date, falling 10% and underperforming five of the six other Magnificent 7 stocks, partly due an apparent lack of a cohesive AI strategy . The average analyst’s price target of $199, however, suggests that Apple shares can rally another 15%. AAPL YTD mountain Apple shares since the start of 2024 Oracle also made the cut. The information technology stock rallied almost 12% Tuesday after posting stronger-than-expected quarterly earnings . The database software provider attributed a 12% rise in sales in its cloud services and licenses support segment to a rise in demand for AI servers. The stock has now climbed 20% year to date. Morgan Stanley included workplace management software company Asana on two of its AI lists, one of companies that are likely to get a productivity boost from AI, and another that highlighted “Global Adopters” of AI. Asana slumped almost 13% Tuesday after issuing light revenue guidance, and has now fallen 15% so far this year. ASAN YTD mountain Asana shares year to date Oil and gas service provider Baker Hughes , video game developer Take-Two Interactive , warehouse real estate investment trust Prologis and biopharmaceutical stock AbbVie also made various Morgan Stanley screens.