The artificial intelligence (AI) revolution is sure to produce some very big winners, but it also has the potential to disrupt large incumbents. How to be sure you're investing in one of the AI beneficiaries, and not the disrupted?
The question is not an easy one. But an assessment of a company's competitive advantages and history defending those competitive advantages may yield clues.
Sifting through today's tech landscape, these three companies look like excellent sleep-at-night additions for your AI-focused portfolio.
Microsoft
Will Microsoft (MSFT -1.24%) be helped or hurt by AI? It certainly appears to be the former, as the company has extremely wide moats across its empire and many ways to win from AI.
Obviously, Microsoft has an exclusivity arrangement with OpenAI, the parent company behind ChatGPT. Microsoft has parlayed that savvy partnership into a leadership position in the AI cloud computing races, yielding best-in-class growth for its Azure cloud platform compared with its rivals. As one of only three major cloud infrastructure players, where most AI processing is likely to take place, Microsoft looks poised to benefit from AI's increased computing intensity for years to come.
But Microsoft's AI advantage goes beyond OpenAI. As a longtime leader in enterprise software, Microsoft has deep relationships with the world's largest businesses going back decades. With a highly regarded brand and with the capital strength to invest in the latest innovation, it's a pretty safe bet Microsoft will be able to use AI to both increase revenues and lower costs over the long-term.
For instance, Microsoft just rolled out AI CoPilot for Microsoft 365 at a cost of $30 per person per month. That's a big price increase, made possible by the wide moat the Microsoft 365 Office software suite enjoys among corporations.
But even beyond Azure and Office, Microsoft's other business segments, each with their own wide moat franchises and network effects, all stand to benefit from AI. The LinkedIn social media platform stands to benefit from advanced AI targeting, and Github users should also benefit from AI natural language prompts for code-writing.
And let's not discount the effect AI can have on Microsoft's consumer businesses. Microsoft owns the Xbox gaming platform, along with a host of game studios such as the recently purchased Activision-Blizzard, where AI can perhaps aid in content creation and curation. Moreover, as AI moves to the edge, AI PCs could enable Microsoft to raise prices on its Surface line of laptops.
With several competitively advantaged products and services and leading AI capabilities, Microsoft should be a big AI winner.
ASML Holdings
What's a good sleep-at-night stock? A company with a monopoly. And that's just what ASML Holdings (ASML -1.30%) has, specifically in the technology needed to produce the world's most leading-edge chips: extreme ultraviolet lithography (EUV).
All AI chips worth their salt require EUV lithography order to pack an incredible number of tiny transistors onto a die. Soon, the AI wars will require ASML's "high-NA" EUV technology, ASML's latest incarnation of EUV, in order to compete.
The new high NA system will shrink a chip's critical dimension, or the smallest feature that can be printed on a wafer, down to 8nm, from the 13nm enabled by regular EUV systems. That's a 1.7 times improvement, which will enable new 2nm chips coming in 2025.
That's why the new high-NA systems cost some $380 million a pop, more than double the cost of the standard EUV systems ASML has sold up until this point.
Image source: Getty Images.
That paves the way for rapid revenue growth starting soon, which should continue through this decade. Of note, the first company to buy a high-NA system wasn't Taiwan Semiconductor Manufacturing, the world's leading fab company today, but rather Intel. That's because Intel is trying to catch up to TSMC and become one of the world's major foundries. Samsung will likely also follow, as will memory chipmakers, who will all use high-NA at some point this decade to produce the DRAM memory chips also crucial to AI systems.
The competition among TSMC, Intel, and Samsung, as well as governments worldwide investing in leading-edge chips produced on their own shores assures robust demand for ASML's machines this decade.
Meta Platforms
Artificial intelligence will likely cement the advantages of companies with huge numbers of users and amounts of proprietary data. Not only does Meta Platforms (META -3.07%) have that in spades with its core Facebook and Instagram platforms, but Meta is also becoming a big player in building AI models itself.
In its core business, AI can help show Reels in which users are more likely to be interested. And for monetization, AI helps create and optimize ads, increasing returns on ad spend for advertisers and therefore increasing the price Meta can charge per ad.
Meta is also building large language AI models itself under the Llama brand name. Interestingly, Meta has decided to make Llama open-source, essentially giving the code away to developers. That's a curious strategy and differentiated from competitors, but it could be effective. The contributions of third parties can potentially improve Llama relative to what Meta could do alone, and the open nature of the model could attract top talent.
Much like Facebook didn't make any revenue at first as it scaled, Llama doesn't make a lot of money now, although other cloud platforms do pay Meta a fee to host the Llama model in their clouds. However, if Llama is used as a baseline model for many future applications, there is more potential for monetization there.
Meanwhile, like all other big tech companies, Meta just introduced its own AI chips called Artemis. Meta claims running workloads on Artemis with it own optimized software will help reduce costs and save energy, although it will still be buying lots of Nvidia chips. too.
Meta has also overcome many challenges in the past. These include the transition to mobile, the threat of Snap, then the even bigger challenge from Bytedance's TikTok. But Meta has managed to use its incumbent position and technological agility to fend off these tech challengers and thrive.
Combined with a brand new dividend, Meta is another stock investors can feel comfortable buying and holding for the long term.
