It's Not Just Chips: Morgan Stanley Advises Investors to Prepare Their Portfolios for a New Cycle of AI Development

AI is beginning to benefit not only manufacturers of equipment and infrastructure for this technology, but also other types of companies, according to Morgan Stanley analysts, as reported by MarketWatch. And while the traditional beneficiaries of AI still have growth potential, according to their estimates, the time has come to diversify AI investments across various industries that are just beginning to feel the impact of this technology’s adoption, experts say.

When investing in AI, Morgan Stanley analysts recommend using the "barbell" strategy. This strategy involves holding traditional AI assets in the portfolio—so-called “AI enablers,” such as chip manufacturers, which are central to building the infrastructure. At the same time, the strategists advise adding shares of new “AI adopters”—from sectors such as transportation and real estate—to the AI portfolio.

Shares of chipmakers and AI infrastructure companies, in general, have outperformed the S&P 500 index since the beginning of the surge in interest in AI, notes MarketWatch. For example, the Philadelphia Semiconductor Index (SOX), which tracks the largest companies in the semiconductor sector, has jumped more than 70% since the start of the year, while the S&P 500 has risen 12.5%. With this in mind, analysts recommend taking a “selective” approach when buying stocks of chipmakers and infrastructure companies to make room for new ideas.

“Now is the time to start increasing investments in early-stage AI software developers and companies implementing AI,” according to Morgan Stanley. In the software segment, analyst Adam Wood highlighted Microsoft, Snowflake, Datadog, Cloudflare, and Dynatrace. He noted that they operate in the “infrastructure” software sector, meaning they develop systems (including cloud storage) that form the foundation for AI applications.

Among the “new entrants to the AI market”—“outside the technology sector”—that Morgan Stanley believes also deserve a place in an AI portfolio, the strategists cited iRhythm Holdings from the healthcare sector and Airbnb.

“The exponential growth in the capabilities of LLMs (large language models—Oninvest note) and the full potential impact of AI on [these companies’] productivity point to broad and significant opportunities for value creation,” the analysts note.

iRhythm Holdings, for example, is already “quantifying” the impact of AI, according to Morgan Stanley. The company uses neural networks to automatically analyze multi-day ECGs from wearable heart monitors: the algorithms detect arrhythmias on their own and generate reports. According to the company’s estimates, this cuts the time doctors need to review medical records and interpret data by nearly half, analysts noted. Although Wall Street is positive about the company’s prospects (16 “buy” recommendations out of 16), iRhythm Holdings’ stock has nevertheless fallen by approximately 37% since the beginning of the year.

Another example is Airbnb, according to Morgan Stanley: the home-rental service says that, thanks to its AI assistant, 40% of inquiries are resolved without human intervention, which significantly speeds up the booking process. Airbnb’s stock has risen by about 14% since the beginning of the year. According to MarketWatch, the stock has 27 “buy” ratings, 17 “hold” ratings, and three “sell” ratings on Wall Street.

Overall, Morgan Stanley maintains positive ratings on the stocks of companies implementing AI across a wide range of industries—including Home Depot, Procter & Gamble, GE Aerospace, and Coca-Cola, as summarized by MarketWatch. For example, Procter & Gamble uses AI to analyze actual consumer behavior, accelerate product development, and optimize advertising spending, while Coca-Cola employs neural networks to personalize marketing, manage “smart” vending machines, and optimize supply chains.

Morgan Stanley analysts also see potential in the stocks of traditional AI beneficiaries. For example, in the chip sector, the investment bank’s analyst Joe Moore noted that demand for shares of companies serving the data center market remains “exceptionally strong.” Nvidia and Broadcom are his two key recommendations, given the expected growth in their revenue from major customers, including developers of AI models.

"We believe that demand for computing power will likely continue to significantly outpace supply for many years to come," Morgan Stanley emphasizes.

In past technology cycles, as trends evolved, it made sense to expect that “market leadership” would shift from one sector to another, the analysts added. However, the deployment of AI infrastructure is slowing down due to a number of constraints, including local resident opposition, power shortages, and political factors. This gives equipment manufacturers the opportunity to continue profiting for longer, as long as their products remain in short supply.

This article was AI-translated and verified by a human editor