We recently made a list of Goldman Sachs’ Best Phase 2 AI Stocks: Top 24 High Conviction AI Stocks. In this piece, we will look at where Microsoft Corporation (NASDAQ:MSFT) ranks among the list of Goldman Sachs’ Phase 2 AI stocks.
While consumer technology stocks had soared in the aftermath of the coronavirus pandemic, back then, their share price gains were due to. the growing demand for technology products and services due to lock downs. Now, big technology stocks have persisted in their strong performance despite high interest rates since they have been judged by the market as the top innovators and performers in the artificial intelligence industry.
Since AI is somewhat of a ubiquitous technology, its impact is on several industries. So far, we’ve seen most of the stock market returns related to AI directly tied to just one stock. This stock continued to be the fifth most trending AI stocks as recently as in mid October and its share price returns are nothing short of unbelievable. From its bottom in October 2022 when the split adjusted share price was a mere $11.23, the shares have gained a stunning 1,100%. In other words, if you had invested just $100 back then in the shares and then held onto them for dear life, your investment would be worth $1,200 today.
This is the magic of AI, a technology that has caught Wall Street and retail investors alike by storm. However, AI’s impact, and its enablement, aren’t limited to the GPU designer we’ve mentioned above. While GPUs are the ‘oil’ for this technology, a wide variety of other components from data center infrastructure, networking equipment, connectivity, and energy all will have to play their part if OpenAI CEO Sam Altman’s plans of initially building as many as 7 AI data centers across the US, with each data center guzzling an unbelievable 5 Gigawatts of electricity, are to come to fruition.
This then makes us ask, what are such stocks that might enable 35 Gigawatts of AI data centers across the US? After all, in order to meet the world’s demand for AI chips, Altman believes that an unfathomable $7 trillion will need to be spent for building 36 chip manufacturing fabs and additional AI data centers. This money has to be spent somewhere, and therein lies the answer to our question. Things get clearer when we look at a detailed research report from investment bank Goldman Sachs. This report segregated the AI sector into four categories.
The first category only included Wall Street’s AI darling, the second was made of AI capacity providers like server companies, other semiconductor firms, and utilities, the third included firms that sell AI products and software, and the fourth category firms were those that will benefit from AI adoption. In its report, the investment bank shared that year to date in July, the first category had returned 139%. As of mid October, this category has gained 179% on the stock market, so safe to say returns have accelerated despite some turbulence in between. By July, the second group of firms was also doing well. Its returns ranged between ~-8% to ~50%, with the average stock having delivered 22%.
Zooming into these firms, the utility sector is one which had particularly impressed the bank. It shared that utilities were the best performing sector in the flagship S&P index between March and May courtesy of their 16% returns. Their three month returns ranked in the 98th percentile since 2022 and were the third highest after 2003 and 2020 rallies. This outperformance is unsurprising given the strong investments in data centers that have taken the US by storm this year.
These investments have led to estimates suggesting that America’s data center hub, Northern Virginia, will require 11,000 megawatts of electricity by 2035 – demand which has already spurred $5.2 billion in investments for transmission lines and coal fired power plants. Estimates from Boston Consulting Group believe that by 2030, AI will account for 16% of America’s energy consumption and touch 130 gigawatts. For a detailed look at the link between electricity use and data centers, you should read 15 Best Data Center Stocks To Buy According to Jefferies, Citi and Wall Street Analysts.
The bustling optimism surrounding AI is also reflected in revenue estimates. Goldman’s September 2024 research shows that 2025 revenue estimates of semiconductor firms, software enablers, and hardware firms except semiconductors are roughly 2.3x, 2.05x, and 1.8x over 2019 levels, respectively. Similarly, non semiconductor hardware companies have seen their revenue forecasts for Q4 2025 jump to $450 billion for a $380 billion gain over Q1 2024’s $70 billion. Makes us wonder whether it’s this group of companies that might see a stock mirror the 1,100% returns of Wall Street’s AI darling.
Our Methodology
To make our list of Goldman Sachs’ best phase 2 AI stocks, we ranked the 20 stocks with the highest year to date returns and some other big tech and data center names that have announced multi billion dollars in capital expenditure by their year to date performance.
For these stocks, we also mentioned the number of hedge fund investors. Why are we interested in the 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).
A close up of a confident investor making a decisive transaction in the stock market.
Microsoft Corporation (NASDAQ:MSFT)
Year To Date Share Price Gain: 12.25%
Number of Hedge Fund Investors in Q2 2024: 279
Microsoft Corporation (NASDAQ:MSFT) is the global leader in operating systems and one of the biggest players in the cloud and enterprise computing industry. It is also one of the leading players in the AI industry due to its partnership with OpenAI. Microsoft Corporation (NASDAQ:MSFT)’s multi billion dollar investment in AI means that it is entitled to a share of OpenAI’s revenue, and the firm’s Azure cloud computing platform is one of the biggest beneficiaries of the new technology. Through Azure, the company enables customers to store, analyze, and run other operations with their data. Microsoft Corporation (NASDAQ:MSFT)’s cloud raked in $28.5 billion in FYQ4 revenue, and its AI investments mean that investors are razor focused on its ability to generate AI profits. This is also why Microsoft Corporation (NASDAQ:MSFT) ranks at the bottom of our list, as a lack of profits has made its shares lose 2% since its fourth quarter report. Consequently, the ability to drive AI profits is key to Microsoft Corporation (NASDAQ:MSFT)’s hypothesis.
Baron Funds mentioned Microsoft Corporation (NASDAQ:MSFT) in its Q2 2024 investor letter. Here is what the firm said:
“Microsoft Corporation is the world’s largest software and cloud computing company. Microsoft was traditionally known for its Windows and Oice products, but over the last five years it has built a $135 billion run-rate cloud business, including its Azure cloud infrastructure service and its Oice 365 and Dynamics 365 cloud-delivered applications. The stock contributed to performance because of continued strong operating results and investor enthusiasm regarding Microsoft’s leadership across the secular megatrends of AI and cloud computing. Recent business momentum continued to show evidence of the strength and attractiveness of Microsoft’s product portfolio among its customer set: (1) Azure OpenAI – its suite of AI services – is now used by 65% of the Fortune 100 and contributed 7% of Azure revenue (an annualized run rate of $5.2 billion); (2) GitHub Copilot – its AI code writing service – is bending the productivity curve for developers (reports of 40%- plus improvements in developer efficiency) and now has 1.8 million paid subscribers, with growth accelerating to over 35% quarter-over-quarter; and (3) Copilot Studio – its AI application service that makes it easier for anyone to build an application, automate a workflow, or create a Copilot using natural language. 30,000 organizations across every industry have used Copilot Studio to customize Copilot for Microsoft 365 or build their own, up 175% quarter-over- quarter. In the March quarter, Microsoft again reported better-than-expected financial results, highlighted by Microsoft Cloud growing 23% year- over-year, with the fastest commercial bookings in six quarters, and Azure accelerating to 31% constant currency growth, up from 28% in the previous quarter. June quarter guidance came in-line with consensus, but the company provided higher guidance for the most important segment, Intelligent Cloud, on the back of continued strong trends across Azure and Azure OpenAI. We remain confident that Microsoft is one of the best- positioned companies across the overlapping software, cloud computing, and AI landscapes.”
Overall MSFT ranks 24th on our list of Goldman Sachs’ top phase 2 AI stocks. While we acknowledge the potential of MSFT as an investment, our conviction lies in the belief that some 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 MSFT but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published on Insider Monkey.
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