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2023 was marked by speculation about the potential of generative AI, while the current year is set to focus on tangible progress, which involves vendors developing and pricing their generative AI features and customers identifying use cases that justify the technology’s expense, Jefferies analysts noted.
Investments in the foundational elements of AI, also referred to as the ‘picks and shovels,’ have consistently outperformed, a trend evidenced in the performance of the VanEck Semiconductor ETF, which has seen a year-to-date increase of 29%, compared to a 5% increase in the iShares Expanded Tech-Software Sector ETF.
“We believe AI spend will spread to other infrastructure providers and to app vendors that enable enterprises to take advantage of Gen AI,” analysts at Jefferies wrote.
“Our AI KIS basket represents the companies we see capturing the most of this transformational opportunity. We advocate for investors to position themselves before enterprise adoption ramps in late ’24 into ‘25, providing a better line of sight to rev uplift,” they added.
Against this backdrop, Jefferies named Microsoft (NASDAQ:MSFT) as its top AI winner of the GenAI cycle, “poised to benefit from both infrastructure (Azure OpenAI) and app angles (series of Copilots) opportunities, capturing the most of this transformational opportunity,” its analysts noted.
They reiterated MSFT as a franchise pick and lifted the price target on the stock from $465 to $550.
In addition, the brokerage firm also sees Alphabet (NASDAQ:GOOGL) as a key AI winner, citing the company’s leading AI expertise, vast and loyal user base, and unparalleled access to fresh data from both Search and YouTube. This stance comes despite concerns that generative AI may pose a long-term threat to Google’s core search business.
Jefferies is also notably bullish on Amazon (NASDAQ:AMZN), Meta Platforms (NASDAQ:META), and CrowdStrike (NASDAQ:CRWD), seeing them as key beneficiaries of the ongoing AI cycle, among other companies.
