Stocks for the Next Stages of the Artificial Intelligence Boom

Morningstar analysts project the artificial intelligence rally is far from over, identifying key investment opportunities in companies that are not only building core AI technology but also those effectively leveraging it for strategic advantage. They categorize advantaged stocks into three areas: differentiated hardware (e.g., Nvidia, TSMC), scale and distribution (e.g., Microsoft, Amazon), and successful early AI utilization with unique data (e.g., Salesforce, ServiceNow). This broader focus suggests significant potential for top-line growth and operating margin expansion as companies integrate AI into products, services, and business models.

Analysis

Morningstar analysts posit that the artificial intelligence investment cycle is expanding beyond foundational hardware providers to include companies adept at leveraging AI for strategic advantage. The analysis segments the opportunity into three key areas. First, in 'differentiated hardware,' Nvidia (NVDA) is highlighted for its comprehensive moat across hardware, software, and networking, though it trades at a premium with a Price/Fair Value (P/FV) of 1.06. Taiwan Semiconductor (TSM) is noted for its manufacturing expertise but also appears fully valued at a 1.19 P/FV, while Marvell (MRVL) presents a more attractively valued option (0.84 P/FV) by enabling the critical networking of AI chipsets. Second, companies with 'scale and distribution' are using AI to fortify their market positions. Microsoft (MSFT) is embedding its Copilot AI across its product suite, supporting its cloud platform's 30% annual growth. Amazon (AMZN) is enhancing both its e-commerce experience and logistical efficiency. Alphabet (GOOGL), trading at a notable discount with a 0.70 P/FV, is using AI to improve its core search and develop its Gemini platform into a broader assistant. Third, the focus is shifting to companies demonstrating 'successful early AI utilization.' Salesforce (CRM) has already achieved a $100 million revenue run rate from AI integration, and ServiceNow (NOW) anticipates its AI-driven sales to quadruple. This signals a market pivot toward rewarding tangible top-line growth and margin expansion derived from AI implementation.

Key Decisions for Investors

• Investors should broaden their AI exposure beyond core semiconductor firms to include companies in the application and integration layers, which are poised for the next phase of growth.
• Consider relative valuation as a key screening factor, as firms like Alphabet (P/FV 0.70), Marvell (0.84), Salesforce (0.83), and Amazon (0.89) appear to trade at a discount to Morningstar's fair value estimates, potentially offering better risk-reward profiles than peers trading at or above fair value.
• For companies in the AI utilization category such as ServiceNow and Salesforce, closely monitor specific execution metrics like AI-product revenue growth and operating margin changes to validate the investment thesis.