In this piece, we will take a look at the ten 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.
Photo by Maximalfocus on Unsplash
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).
10. Constellation Energy Corporation (NASDAQ:CEG)
Number of Hedge Fund Holders In Q3 2024: 78
Constellation Energy Corporation (NASDAQ:CEG) is a clean energy company that’s been one of the hottest utility plays in 2024. This is because of the firm’s focus on nuclear power which has thrust it into the limelight of Wall Street’s AI fervor. Constellation Energy Corporation (NASDAQ:CEG) generates 32GW of electricity through its portfolio, out of which 90% comes via renewable energy. While AI and nuclear energy play an important role in its hypothesis, another key factor that should drive is Constellation Energy Corporation (NASDAQ:CEG)’s plan to generate 13% compounded EPS growth by 2030. This is key to evaluating the profitability of its nuclear initiatives which have seen the firm partner up with Microsoft to restart the Three Mile Island nuclear reactor. Additionally, the enthusiasm surrounding nuclear deals could rapidly be priced out as well was evident at the November start. This occurred when Constellation Energy Corporation (NASDAQ:CEG)’s sank by 12.5% after regulators rejected another nuclear firm’s request to increase electricity capacity for an Amazon data center.
Fred Alger Management mentioned Constellation Energy Corporation (NASDAQ:CEG) in its Q3 2024 investor letter. Here is what the fund said:
“Constellation Energy Corporation (NASDAQ:CEG) is the largest producer of clean energy in the U.S., with 32,400 Megawatts of capacity, 87% of which is nuclear generated. Its nuclear, hydro, wind, and solar facilities provide 10% of all clean energy on the U.S. grid and 22% of its clean baseload power. We believe the company stands to benefit from the increasing electrification of the U.S. economy. The rise of electric vehicles, data centers, and reshoring of American manufacturing is driving U.S. electricity load growth for the first time in nearly two decades. In our view, AI workloads are projected to significantly increase energy demand from data centers over the next few years. As American enterprises seek clean and reliable energy sources, nuclear power, which is carbon-free and dependable, stands out compared to intermittent renewables like wind and solar. Constellation, as an unregulated independent power producer, benefits from low fixed costs and can capture upside from rising electricity prices. We believe that potential opportunities for earnings growth include colocation (data centers near nuclear plants) and energy-matching programs with cloud providers willing to pay premium prices for nuclear energy. The Inflation Reduction Act also provides downside protection through a guaranteed minimum price for nuclear generation. During the quarter, shares contributed to performance from two events: 1) annual electricity auctions revealed tightening markets driven by increasing demand, driving higher pricing in the Middle Atlantic states, leading management to raise their fiscal 2024 earnings projections. 2) On September 20, 2024, Constellation Energy announced the signing of a 20-year power purchase agreement with Microsoft, which includes restarting Three Mile Island’s Unit 1 to supply energy.”
9. Vertiv Holdings Co (NYSE:VRT)
Number of Hedge Fund Holders In Q3 2024: 91
Vertiv Holdings Co (NYSE:VRT) is a computer hardware company that designs and sells power management, racks, cooling equipment, and other associated equipment. It is one of the top-performing stocks in 2024 as the shares are up 180% year-to-date. Vertiv Holdings Co (NYSE:VRT) has been an investor favorite particularly since it also sells liquid cooling products. These are indispensable for AI workloads due to the excessive heat generated by performance-intensive GPUs. The firm is particularly exposed to the data center industry as it generates 75% of its revenue from this industry. The positive catalysts from AI-generated demand were also evident in Vertiv Holdings Co (NYSE:VRT)’s third quarter results. These saw the firm grow sales by 19% and orders by 37%. Therefore, the year-to-date share price gain is unsurprising.
Baron Small Cap Fund mentioned Vertiv Holdings Co (NYSE:VRT) in its Q3 2024 investor letter. Here is what the fund said:
“Vertiv Holdings Co (NYSE:VRT) is a leader in data center equipment, with significant share in both power and cooling applications. The stock rebounded off recent weakness, as investors gained confidence that a massive build out of AI data centers globally was on the horizon. Vertiv’s strong relationship with chip manufacturers and involvement in the necessary technology roadmap for solutions as the energy density of server racks increases were catalysts. Vertiv’s orders were up 57% year-over-year in the second quarter, backlog was $7 billion, a record, and 2024 operating profit margin and EPS guidance was raised.”
8. Oracle Corporation (NYSE:ORCL)
Number of Hedge Fund Holders In Q3 2024: 91
Oracle Corporation (NYSE:ORCL) is one of the biggest enterprise resource planning products providers in the world. It commands an 18.4% market share of the ERP market which makes it the second biggest firm of its kind. Oracle Corporation (NYSE:ORCL) has leveraged its experience of providing businesses with operational infrastructure to establish a foothold in the AI industry via its Oracle Cloud Infrastructure (OCI) business. With OCI, the firm aims to bring 131,072 NVIDIA Blackwell GPUs under its wing to take the lead in providing businesses with AI computing infrastructure. The bullishness in AI is also evident in Oracle Corporation (NYSE:ORCL)’s fiscal year 2026 guidance as it expects to earn $66 billion for 12% annual growth. By 2029, the firm aims to grow its revenue to $104 billion along with 45% in margins. Along with positive AI catalysts, management execution on these financial fronts also performs a key role in Oracle Corporation (NYSE:ORCL)’s hypothesis.
Mar Vista Investment mentioned Oracle Corporation (NYSE:ORCL) in its Q3 2024 investor letter. Here is what the fund said:
“Oracle Corporation (NYSE:ORCL) is seeing revenue acceleration as it benefits from several years of investing in cloud-based solutions, which are now driving demand. The company is seeing broad-based demand for multiple of its cloud offerings, including its Fusion ERP Suite, its NetSuite offering and the Oracle Database. In addition to those anchor products, Oracle is also gaining traction with its OCI Gen 2 platform-as-a-service offering, which is winning mindshare from leading cloud customers, including Open AI, due to its favorable performance and cost metrics. This OCI Gen 2 solution is well-positioned to become a viable hyper scaler offering, furthered by Oracle’s recently announced partnerships with Microsoft Azure, Google Compute Platform, and Amazon’s AWS, which have all agreed to host Oracle’s flagship database in their respective hyper-scaler cloud environments. We believe this could support a third leg of growth for Oracle as its large installed base of database customers shift from on-premises to cloud deployments. As database customers migrate to a Cloud subscription model, Oracle could increase database software support revenues by 3-to-5 times. We continue to believe Oracle is well-positioned to grow intrinsic value strong double-digits over our investment horizon.”
7. Vistra Corp. (NYSE:VST)
Number of Hedge Fund Holders In Q3 2024: 97
Vistra Corp. (NYSE:VST) is one of the top-performing stocks of 2024 as its shares are up by a whopping 305% year-to-date. It is a Texas-based utility, and as you might have guessed, the firm has wide exposure to the nuclear industry. Vistra Corp. (NYSE:VST) also benefits from being an unregulated utility which enables it to self-set rate of returns on its power generation projects. The stock has risen in 2024 after the firm’s decision to bring a nuclear business fully under its fold sent the shares soaring by 25%. Vistra Corp. (NYSE:VST) also scored another win this year when regulators approved its request to extend the operational life of a nuclear power plant. For full-year 2024, the firm aims to earn between $5 billion to $5.2 in operating income and $2.65 billion to $2.85 billion in free cash flow. Along with deals with data center firms for clean energy and the regulatory environment for future projects, these also play an important role in Vistra Corp. (NYSE:VST)’s story.
Meridian Funds mentioned Vistra Corp. (NYSE:VST) in its Q3 2024 investor letter. Here is what the fund said:
“Vistra Corp. (NYSE:VST) is an integrated retail electricity and power generation company, primarily serving Texas and the Midwest. We own Vistra because we expect power markets to continue tightening as baseload supply declines, coupled with rising demand from data centers, electric vehicles, and manufacturing reshoring. These factors create a favorable pricing environment for Vistra’s generation fleet, especially its nuclear and gas assets. The stock performed well during the period for three key reasons: tightening energy markets and strengthened pricing in forward-year energy contracts, the continuation of Vistra’s aggressive share repurchase program, and the company’s announced plan to acquire the remaining interest in Vistra Vision at an attractive valuation. Additionally, the company reaffirmed its 2024 guidance, indicating that results are trending toward the upper end of the previously projected range. We took advantage of the stock’s strength this quarter to trim our position.”
6. Broadcom Inc. (NASDAQ:AVGO)
Number of Hedge Fund Holders In Q3 2024: 128
Broadcom Inc. (NASDAQ:AVGO) is one of the biggest players in the semiconductor design industry. It is also a diversified technology firm that benefits from having a sizable software business under its wing. On the semiconductor front, Broadcom Inc. (NASDAQ:AVGO)’s modems and other products are used across a multitude of personal computing devices. This division also lends the firm the potential to generate additional favorable catalysts from the AI industry through custom chip design. NVIDIA’s chips are among the most expensive and contested products in the world which has led to tight supply. Consequently, should firms like OpenAI turn to Broadcom Inc. (NASDAQ:AVGO) to design custom processors, the firm could add more AI tailwinds. On the flip side, the loss of key orders, such as those from Apple could create trouble.
Columbia Threadneedle Investments mentioned Broadcom Inc. (NASDAQ:AVGO) in its Q3 2024 investor letter. Here is what the fund said:
“Similar to the earnings results for Nvidia, shares of Broadcom Inc. (NASDAQ:AVGO) initially sold off after the company reported solid earnings that fell light of elevated market expectations, but the stock did recover from its drawdown in the matter of a few weeks. With an enticing combination of custom chip offerings as well as networking assets, Broadcom remains one of the best positioned companies as part of the AI revolution. Broadcom outlined a path to derive a majority of its revenue from the AI end market within a couple of years, and the non-AI part of the business has stabilized after a deep correction. The company’s dominant market position in its end markets, along with durable growth, strong margins and best-in-class capital allocation, presents an opportunity to compound capital over time.”
5. Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM)
Number of Hedge Fund Holders In Q3 2024: 158
Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM) is the world’s largest and leading contract chip manufacturer. The firm enjoys a wide moat in its industry courtesy of its leading-edge technologies such as 3-nanometer and next-generation technologies such as 2-nanometer. While a competitive moat isn’t a surefire guarantor of industry dominance, Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM) benefits from the fact that setting up chip manufacturing plants requires billions of dollars in investment and decades of expertise. Consequently, it is the only firm capable of providing high-yield chips to big-ticket AI players such as NVIDIA. Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM) has also grown in importance in the chip industry due to US chip giant Intel’s troubles with manufacturing since it is the only one of two companies in the world that are capable of manufacturing advanced chips with a foundry business model.
Baron Funds mentioned Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM) in its Q3 2024 investor letter. Here is what the fund said:
“We established a small position in Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM). Morris Chang founded TSMC in 1987, as the world’s first dedicated semiconductor foundry. Until then, semiconductor chips were always designed and manufactured by the same company. TSMC introduced a groundbreaking new business model, in which it acted purely as a contract manufacturer, which proved to be highly successful. TSMC maintained a focus on improving its manufacturing process technology and enabled the emergence of innovative fabless design companies, including NVIDIA, Apple, and Qualcomm, who became TSMC’s key customers. Today, TSMC has a more than 60% share of the total semiconductor foundry market and over 90% share in leading-edge manufacturing. TSMC enjoys high barriers to entry given the ever-increasing cost and technological complexity of semiconductor manufacturing while benefiting from economies of scope as once leading-edge manufacturing becomes lagging edge on fully depreciated equipment. TSMC also benefits from scale– higher profits lead to higher R&D and capex investments, allowing for further technological differentiation, resulting in more profits. We believe TSMC will sustain strong double-digit earnings growth for years to come, driven by continued market share gains, strong pricing power, and structural growth in AI demand. According to C.C. Wei, TSMC’s CEO, “almost all the AI innovators are working with TSMC to address the insatiable AI-related demand.”6 Management forecasts that revenue from server AI chips, such as GPUs and other AI accelerators, will grow at a 50% CAGR from 2022 to 2028 and account for more than 20% of TSMC’s revenue by 2028. We except further long-term upside from the eventual proliferation of edge AI devices, including AI smartphones and AI PCs, which will require significantly more computing power and drive even stronger demand for TSMC’s leading-edge technology.”
4. Alphabet Inc. (NASDAQ:GOOGL)
Number of Hedge Fund Holders In Q3 2024: 202
Alphabet Inc. (NASDAQ:GOOGL) is one of the biggest technology companies in the world. However, even though the firm has considerable resources that have enabled it to establish a foothold in the AI market through computing resources and foundational AI software, the stock is up a weak 25% year-to-date. Part of the reason behind the muted performance is Alphabet Inc. (NASDAQ:GOOGL)’s reliance on the search engine industry for its bread and butter. As of H1 2024, 57% of the firm’s revenue came from its Search business, and 2024 has seen Alphabet Inc. (NASDAQ:GOOGL) on the radar of the Justice Department for its search engine dominance. However, the firm enjoys a sizable moat in the AI industry as its Bard foundational AI model allows it to build AI services, and its TPU chips enable it to rent AI computing capacity to other companies.
Alluvium Asset Management mentioned Alphabet Inc. (NASDAQ:GOOGL) in its Q3 2024 investor letter. Here is what the fund said:
“Alphabet Inc. (NASDAQ:GOOG), ie Google/YouTube, having returned 20.8% in the June quarter, gave a fair bit of that back by falling 8.8%. Its results seemed pretty positive, and appeared to beat expectations. Management claims its AI integration into its search business is working well, and the margin expansion from costs out is expected to continue. Market chatter suggests that the selloff stems from concerns about the high capital spending on servers and data center equipment. Alphabet has made it clear that this spending is necessary, and somewhat defensive as it can’t risk losing the AI war (a “build it, and they will come” approach). Also, the new Department of Justice case against it probably did not help matters. Nonetheless, we saw no need to adjust our estimates. We wrote last quarter that it traded at a premium to our valuation, but not so much as to warrant selling. With the share price falling and the premium reducing, our view is unchanged. It represents 4.4% of the Fund.”
3. Meta Platforms, Inc. (NASDAQ:META)
Number of Hedge Fund Holders In Q3 2024: 235
Meta Platforms, Inc. (NASDAQ:META) is the parent company of Facebook, Instagram, and WhatsApp. Its dominance in the social media industry is primarily through Facebook, its social network with 3.2 billion users. The user base forms the backbone of Meta Platforms, Inc. (NASDAQ:META)’s revenue since the firm earns money by working with advertisers. The wide moat it enjoys in its industry has enabled the firm to amass sizable resources as is evident through its cash and equivalents of $41 billion. Meta Platforms, Inc. (NASDAQ:META) has used its resources to establish a foothold in the AI industry by ordering NVIDIA’s GPUs and creating the Llama foundational AI model. Through these, it is providing AI-driven experiences to advertisers and users in the hopes of monetizing the technology. Consequently, AI monetization and additional capital expenditure for AI will drive Meta Platforms, Inc. (NASDAQ:META)’s hypothesis moving forward.
Polen Capital mentioned Meta Platforms, Inc. (NASDAQ:META) in its Q2 2024 investor letter. Here is what the fund said:
“Meta Platforms delivered robust results in the period, with revenue growth accelerating in the first quarter. However, revenue comparisons for Meta will become more difficult from here, and its guidance for 2Q revenue fell below market expectations. After the company’s “year of efficiency,” where it cut costs in its core business, management is now indicating another ramp-up in GenAI and metaverse spending, spurring concerns about future profit margins. Metaverse spending, by our calculations, is now over $20 billion per year with little to no expected return on the foreseeable horizon.”
2. 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.”
1. Amazon.com, Inc. (NASDAQ:AMZN)
Number of Hedge Fund Holders In Q3 2024: 286
Amazon.com, Inc. (NASDAQ:AMZN) is the world’s largest eCommerce firm. It also enjoys a strong presence in the cloud computing industry through its AWS business division. Combined, the eCommerce and cloud businesses enable Amazon.com, Inc. (NASDAQ:AMZN) to simultaneously operate in high volume and high margin industries. They also provide it with wide exposure to AI, through which Amazon.com, Inc. (NASDAQ:AMZN) is both an AI enabler and a beneficiary. The firm ‘enables’ AI through its multi-billion dollar investment in Anthropic which has provided it with access to the Claude foundational AI. It is an AI beneficiary as its eCommerce business allows it to use AI to improve the experience for merchants and AWS enables it to sell AI products to other businesses. Amazon.com, Inc. (NASDAQ:AMZN) is also one of the few firms with the full AI stack, from its custom processors to services such as Amazon Bedrock for AI application development.
Polen Capital mentioned Amazon.com, Inc. (NASDAQ:AMZN) in its Q3 2024 investor letter. Here is what the fund said:
“The largest absolute detractors were Alphabet, Airbnb, and Amazon.com, Inc. (NASDAQ:AMZN). Amazon’s position as a notable detractor speaks more to the size of the position than the magnitude of the underperformance, as the company delivered a solid set of results during the quarter.
We trimmed our positions in Amazon, Alphabet, and Microsoft during the quarter. As we have previously, we trimmed Amazon slightly to bring the weight back to 15% for risk management purposes. We remain very positive on our investment thesis of strong revenue growth and even stronger earnings and free cash flow growth continuing over the next few years.”
AMZN is a stock poised to benefit from AI. While we acknowledge the potential of AMZN 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 timeframe. If you are looking for an AI stock that is more promising than AMZN 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.
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