Buy stocks where AI is core to investment thesis, Morgan Stanley says

Buying stocks with a rising exposure to artificial intelligence could lead to outperformance later this year, according to Morgan Stanley. The artificial intelligence revolution has powered the current bull market rally, with Nvidia leading the way. Year to date, shares of Jensen Huang’s maker of graphics processing units used to power AI have rallied 142% after soaring 239% in 2023. But for investors who have missed out on the AI trade, Morgan Stanley says it’s not too late. In a recent note, a team of eight Morgan Stanley strategists led by Edward Stanley highlighted a group of stocks where artificial intelligence is beginning to play a bigger role in their business, which they called “the enablers.” The investment bank wrote that since January 2023, “core-to-thesis” enablers have returned more than 100%, as compared to only 25% returned by “moderately exposed” enablers. “We believe this strategy of picking stocks where AI materiality is increasing will continue to work for investors for the remainder of 2024,” Morgan Stanley wrote. “However, after a strong 18 months of performance by this enabler group, investors will need to cast a wider net to find attractive risk reward skews from here, in our view.” Solar technology company First Solar made Morgan Stanley’s list. Shares have soared 59% this year. through Thursday’s close. Most analysts covering the stock rate it the equivalent of a buy, although the average analyst also sees 5% downside, based on the consensus price targets collected by FactSet. Earlier this week, both Morgan Stanley and Goldman Sachs reiterated buy ratings on First Solar. “We remain bullish on the outlook for FSLR and believe several tailwinds could support higher [average selling prices] or potential capacity expansion,” Goldman Sachs wrote. Morgan Stanley also highlighted Broadcom as an AI enabler. The semiconductor manufacturer has rallied more than 25% this year but remains extremely popular with analysts. Most analysts rate it the equivalent of a buy, with the average consensus price implying 10% upside. Earlier this week, Bernstein Research named Broadcom one of its best ideas . The stock “remains among the cheapest of all the ‘AI play’ semis, with a better narrative than many peers,” said Bernstein analyst Stacy Rasgon. JPMorgan on Thursday reiterated Broadcom at an overweight rating, while Melius Research this week initiated coverage of the stock with a buy rating. “Sustainable leadership in its key segments, with a strong AI portfolio that benefits from the ‘inferencing phase’ of Generative AI,” Melius wrote. Facebook- and Instagram-parent Meta Platforms was also called an AI enabler. Shares of the social media platform have risen nearly 41% this year. Analysts are overwhelmingly bullish on the stock but on average only see 3% upside, based on the consensus price target. Earlier this week, Raymond James hiked its price target on the stock to $550, implying that shares could potentially rise 11%. “We think the Street underappreciates Meta’s leadership within foundational GenAI building blocks,” wrote analyst Josh Beck. “The optionality to pursue multiple GenAI models simultaneously while facing minimal core social business risk supports our Strong-Buy rating and top pick preference for META.” — CNBC’s Michael Bloom contributed to this report.