Sticking with industry leaders that grow their revenue and profits over many years is how you can build wealth in the stock market. Some of the most promising opportunities right now are companies that enable the adoption of artificial intelligence (AI) across the economy.
Research from Morgan Stanley shows we could still be in the early innings of this shift, with corporate spending on AI expected to grow to roughly $10 trillion in the current cycle. Here are two stocks that can help you profit from this opportunity.
Image source: Getty Images.
Microsoft
Millions of people use Microsoft (MSFT 0.38%) software at home or work every day. This puts it in a great position to monetize AI features across its products. The company's cloud segment is evidence of this, with Microsoft Cloud revenue increasing 26% year over year last quarter. This shows AI services becoming a key driver of the company's growth.
Given what's at stake, Microsoft is investing in data center capacity and AI chips, such as the Maia 200 custom AI accelerator that powers the models behind Copilot. These investments should support growing demand for AI cloud services, with revenue from its Azure enterprise platform up 39% year over year in the recent quarter.
It is also integrating Copilot into high-value products that can command premium pricing, such as Microsoft 365 and GitHub. With that strategy, it's no surprise to see revenue from productivity software and business processes up 16% year over year last quarter, with management seeing increasing contribution from Copilot demand.
NASDAQ: MSFT
Key Data Points
The stock's forward price-to-earnings (P/E) ratio of 25 looks attractive for a business that has consistently reported double-digit revenue and earnings growth. Its ability to monetize AI investments with Copilot and Azure makes Microsoft a solid investment.
Broadcom
When you see companies like Microsoft investing more in data centers, that is good news for Broadcom (AVGO 1.21%). Data centers need high-performance networking to connect large clusters of chips, and Broadcom has been a major supplier of these components for years.
The company's industry leadership is evident in growing profits and high margins. Broadcom posted a 39% year-over-year increase in adjusted (non-GAAP) net income last quarter, reaching $9.7 billion. This represents a high margin on $18 billion in revenue in the quarter, which also grew 28% year over year. This growth was driven mainly by booming demand for Broadcom's AI accelerators.
NASDAQ: AVGO
Key Data Points
Broadcom's profitability also supports a shareholder-friendly cash return program through growing dividend payments. Broadcom paid $2.8 billion in cash dividends in the fourth quarter, and it has consistently increased the dividend over the last decade. It paid out half of its trailing earnings in dividends last year, bringing the current yield to 0.73%.
The stock looks expensive on a trailing P/E basis, but that's because Broadcom expects robust demand for its AI semiconductors. Analysts are forecasting 31% annualized earnings growth over the next few years. Using this year's consensus estimate, the stock's forward P/E of 32 looks reasonable and should allow investors to realize solid returns.
