3 Stocks That Will Be Big AI Winners

Key Takeaways

• Use cases for generative AI have proliferated beyond code writing and customer service. As AI agents become increasingly capable, we see many additional uses for generative AI, which should catalyze demand for AI inference.
• Amazon, Microsoft, and Alphabet are AI winners. As we think about the generative AI value chain, we see tremendous value in the infrastructure layer where these firms compete. We also believe this positioning strengthens their already-wide Economic Moat Ratings.
• The public cloud vendors have access to an incredible amount of capital, and large-scale data center deployments are essentially cost-prohibitive for smaller players.
• The cloud providers should be able to repurpose data center expansion to more general-use internet-as-a-service workloads if AI demand fails to materialize, which derisks current capex more than many investors appreciate.

The buzz around generative artificial intelligence is electrifying. Since the launch of ChatGPT in November 2022, we have seen a dizzying evolution of the technology, its market opportunity, and more recently, of the scale of public cloud vendors’ capital expenditures needed to support generative AI services.

Amazon AMZN, Microsoft MSFT, and Alphabet’s GOOG surge in capex—estimated to be north of $250 billion in 2025 alone—has left some investors wondering if these investments in generative AI will produce strong economic returns for these tech behemoths. In short, our view is that these investments should generate robust economic returns for the public cloud vendors, on par with the returns they enjoy from their high-margin public cloud businesses.

As we turn the pages of history, we see a similar dynamic. When Amazon, Microsoft, and Google set out to build data centers to support the nascent public cloud market, investors were concerned about these investments’ future returns. However, over time, profitability and returns have improved as these firms completed their initial data center buildouts in 2005-20. We see a similar trend for investments in generative AI. We remain confident that all three main public cloud vendors are well-positioned to be long-term winners in this emerging market.

Four Keys To Success for The AI Winners

Our view of their long-term success is shaped by four key points. First, these are part of an exclusive list of companies that can foot the massive costs of training large language models and invest in infrastructure that can run AI inference workloads. While there has been great hue and cry about the decreasing costs of training LLMs, we believe the infrastructure required to serve demand can only be built and operated by these public cloud vendors, with their vast financial and engineering resources.

Second, these investments stand to catalyze an increase in cloud spending, with early signs of robust demand for public cloud infrastructure for generative AI workloads. This uptick in demand should help these cloud providers produce strong long-term returns on their current generative AI investments.

Third, while capex is scheduled to continue accelerating meaningfully in 2025, we see a general tapering from capital intensity in 2026 onward for all three public cloud players. While capital intensity draws down as demand continues to ramp up, this dynamic should allow cloud vendors to meaningfully monetize their generative AI investments via their public cloud businesses.

Fourth, these vendors have a litany of other use cases for these infrastructure investments earmarked for generative AI. Even if generative AI demand does not materialize at the rate these firms project it will, the data centers they’re building will not sit idle. Rather, they will be used to serve a mix of internal and external use cases that we consider value-accretive.

Investors Should Expect Strong Growth From the Cloud Providers’ Generative AI Services

Generative AI demand is tangible today. The cloud service providers do not have to wait for some nebulous time years down the road for demand to materialize. The three major providers are already generating a $20 billion run rate for generative AI services. We expect that to grow meaningfully over the next five years, such that generative AI generates in excess of $100 billion in aggregate for Azure, AWS, and Google Cloud Platform. In our view, the cloud providers capture the lion’s share of value within the generative AI ecosystem.

While we acknowledge the capex surge for cloud service providers, we expect this to level off beginning in 2026. We note the frontloaded nature of capacity expansion, as land purchases and building construction for the associated infrastructure are one-time in nature, or at least longer-lived than the servers within the facilities. We think the market expects escalating capital intensity.

Our analysis indicates that margins will be attractive on new data center capacity, which will drive attractive returns. Skeptics seem to be ignoring how returns on these investments have been historically attractive for the cloud service providers and drive a disproportionate share of these firms’ valuations.

Overall, we find ourselves at odds with what the market seems to believe about the cloud service providers’ capex surge. One important difference is that we see the cloud providers as capturing the majority of the value created from generative AI. Further, we see the generative AI model providers as facing the most competition and being at risk of commoditization.

Cloud Service Providers Will Win in Generative AI, With Microsoft and Alphabet Our Top Picks

Our top picks are Microsoft and Alphabet, based on a combination of their current cloud offerings, overall strategies, existing competitive positions, AI leadership, and valuation levels. We think there is room for multiple winners, and we think both companies will do well in the coming years.

We see Microsoft as having an early lead in generative AI, based on its partnership with OpenAI. Microsoft continues to benefit from its software portfolio, which touches virtually every household and business. Alphabet remains the undisputed leader in search. Their strong positioning in these areas should allow both to extend their leads in cloud services overall and generative AI specifically. We think Amazon will also benefit from generative AI, although we stop short of highlighting it as a top pick immediately, as the technology is likely to have less of an impact on the company, given the size of AWS relative to the rest of the business.