5 Stocks to Buy to Invest in AI With Less Risk I August 5, 2024

Summary

The Morning Filter discusses key investment insights, focusing on AI's impact on the market. Susan Jinsky reports on economic forecasts, earnings from companies like Eli Lilly and Novo Nordisk, and the potential of AI in enterprise software. She highlights Microsoft's leadership in AI and its fair value estimate increase, while Intel faces challenges. Strategists Brian Kalillo and Travis Miller explore AI's role in tech and utilities, emphasizing Nvidia's dominance and the growth opportunities for data center-related utilities.

Takeaways

• 📉 The U.S. market is experiencing a sell-off following a weak job creation report and the highest unemployment rate since late 2021, indicating potential recession fears.
• 💊 Eli Lilly and Novo Nordisk, despite recent stock pullbacks, are considered overvalued but have long-term growth potential in weight loss and diabetes treatments.
• 🎥 Disney and Paramount are set to report earnings with both stocks appearing undervalued; Disney's streaming service subscriber growth and Paramount's Sky deal are points of interest.
• 📈 Several of Dave's stock picks, including Realty Income, International Flavors & Fragrances, Fortinet, and Baxter, are undervalued and have upcoming earnings reports.
• 🔝 Morningstar raised its Fair Value Estimates for Microsoft, Meta Platforms, Amazon, and Apple following their earnings reports, reflecting positive outlooks and potential undervaluation.
• 📉 Intel's Fair Value Estimate was significantly reduced by Morningstar due to a disappointing forecast, layoffs, and dividend pause, leading to a substantial stock sell-off.
• 🍎 Berkshire Hathaway's sale of half its stake in Apple may impact the stock; Morningstar forecasts double-digit iPhone revenue growth in 2025 driven by generative AI features.
• 🧠 AI, particularly generative AI, is creating new opportunities and efficiencies; however, the market is currently favoring companies providing the infrastructure, like Nvidia.
• 💡 AI's impact on enterprise software is expected to be through infused AI in existing products rather than standalone AI tools, with potential for upselling and operational efficiencies.
• 💼 The utilities sector can benefit from the growth of AI through increased demand for electricity by data centers, with specific utilities in Wisconsin, Indiana, and the Gulf Coast poised for significant growth.
• 🏭 Taiwan Semiconductor Manufacturing Company (TSMC) is highlighted as an undervalued stock with a strong market position in chip manufacturing, important for AI development.

Q & A

What is the main theme of the 'Morning Filter' episode presented by Susan Jinkins?

The main theme of the episode is to cover what investors should have on their radars this week, including new Morning Star research and a few stock ideas to research further, particularly focusing on the impact of AI on investing.

Why is this week considered quiet in terms of economic reports?

This week is considered quiet in terms of economic reports because of the lack of significant economic data releases following the release of the jobs report last week, which showed weak job creation and the highest unemployment rate since late 2021.

What was the market reaction to the jobs report released last week?

The market reaction to the jobs report was a sell-off, triggered by fears of a recession in the US due to weak job creation and the highest unemployment rate since late 2021.

Which companies are at the forefront of the weight loss drug story and how are they valued heading into earnings?

Eli Lilly and Novo Nordisk are at the forefront of the weight loss drug story. Despite recent pullbacks, they are still considered about 50% overvalued heading into earnings.

What is the stance of Morning Star's health care team on the growth potential of Eli Lilly and Novo Nordisk?

Morning Star's health care team believes that both Eli Lilly and Novo Nordisk have a long runway for growth with their stable of weight loss and diabetes treatments, but they also think the market is overenthusiastic about these stocks and sees significant price risk.

What is the expected impact of 'Inside Out' success at the box office on Disney's results according to Matt Dolan?

Matt Dolan, Morning Star's senior analyst, is curious to see how much 'Inside Out' success at the box office contributes to Disney's results, particularly in terms of subscriber adds to Disney's streaming service.

What is the significance of the fair value estimate changes for Microsoft, Meta Platforms, Amazon, and Apple after their earnings reports?

The fair value estimates for these companies were raised by Morning Star, indicating that the companies performed well and are considered undervalued or increasingly attractive, which could be a positive signal for investors.

Why did Morning Star reduce its fair value estimate for Intel by 30%?

Morning Star reduced its fair value estimate for Intel by 30% due to a disappointing forecast, announced layoffs, and the pausing of its dividend, which led to a selloff of the stock.

What is the potential impact of Berkshire Hathaway selling about half of its stake in Apple on the stock?

The news of Berkshire Hathaway selling about half of its stake in Apple could potentially impact the stock by affecting investor confidence and market perception, although the actual impact would depend on various market factors.

What are the key areas where AI is currently being utilized and how does it benefit businesses?

AI is currently being utilized in areas such as computer coding, helping programmers, and customer service, where it allows representatives to access information more quickly to better serve customers. This deployment of AI is making businesses more efficient.

How does the growth of AI and data centers present an opportunity for utilities companies?

The growth of AI and data centers presents a significant opportunity for utilities companies as data centers are huge electricity consumers. This increased demand for electricity can lead to earnings growth and more investment in infrastructure for utilities.

Which utilities are expected to benefit the most from the growth in data center electricity consumption?

WEC Energy Group, NYS source, and Entergy are expected to benefit the most from the growth in data center electricity consumption due to their locations being significant centers for data center development and the potential for increased demand growth.

How does the investment in AI by companies like Microsoft and Nvidia potentially impact their stock valuation?

The investment in AI by companies like Microsoft and Nvidia can potentially impact their stock valuation positively if it leads to increased revenue, improved efficiency, and a strengthened competitive position in the market.

What is the potential long-term impact of AI on various industries and why is it significant for investors to consider?

The potential long-term impact of AI on various industries includes advancements in enterprise software, drug discovery, genetics, autonomous driving, and robotics. It is significant for investors to consider because these developments could lead to new revenue streams, increased efficiency, and transformative changes in industry operations.

Outlines

00:00

📈 Market Insights and Stock Performance Overview

This paragraph provides an overview of the current investment landscape, focusing on economic reports and market reactions to recent job creation data and unemployment rates. It discusses the potential for a market sell-off and highlights specific companies reporting earnings, such as Eli Lily and Novo Nordisk, which are considered overvalued despite their growth potential. The paragraph also mentions undervalued stocks like Disney and Paramount heading into earnings and concludes with a note on Morning Star's fair value estimates for major companies including Microsoft, Meta Platforms, Amazon, Apple, and Intel.

05:00

🧠 The Potential of AI and its Impact on Investing

The second paragraph delves into the world of artificial intelligence (AI), discussing its recent surge in popularity and potential for growth. It includes interviews with Morning Star strategists Brian Kalillo and Travis Miller, who explore the current state and future of AI, its applications, and how it can benefit various industries. The conversation covers the infrastructure needed for AI, the role of companies like Nvidia, and the potential for AI in enterprise software and utilities. The paragraph also touches on the investment opportunities presented by AI and the importance of understanding its integration into existing products and services.

10:01

💡 AI's Role in Enhancing Business Efficiency and Growth

This section continues the discussion on AI, focusing on its role in improving business efficiency and driving revenue. It examines how AI is currently being utilized in areas such as computer coding and customer service to streamline operations and enhance service delivery. The paragraph also explores the potential for AI to generate additional revenue through upsell opportunities and to maintain competitive advantage by integrating AI into existing products, as exemplified by Microsoft's AI tools.

15:03

🚀 Long-Term Growth Opportunities in AI and Utilities

The fourth paragraph shifts the focus to the long-term growth opportunities in AI, particularly in the utility sector. It discusses the potential for utilities to benefit from the increased power demand of data centers, which are significant consumers of electricity. The paragraph highlights the importance of understanding regional demand growth and the strategic positioning of certain utilities to capitalize on this trend. It also identifies specific utilities that are poised to benefit from the expansion of data centers and the subsequent increase in power demand.

20:03

🏭 Investing in AI-Related Stocks and Utility Companies

The final paragraph wraps up the discussion by identifying specific stock picks that are well-positioned to benefit from the growth of AI and data centers. It emphasizes the importance of selecting undervalued stocks with reliable cash flows and strong competitive positions. The paragraph presents a list of recommended investments, including Microsoft, Taiwan Semiconductor Manufacturing, WEC Energy Group, NYS source, and Entergy, all of which are expected to see significant growth due to their involvement in AI and data center development. The summary also encourages viewers to visit Morning Star for more in-depth analysis on these stocks.

Keywords

💡Morning Filter

The 'Morning Filter' is a show that discusses topics relevant to investors, including market trends, economic reports, and company earnings. It serves as a filter for what should be on investors' radars. In the script, it is the program that Susan Jinsky is hosting, covering various financial topics and stock ideas.

💡Economic Reports

Economic reports are official data releases that provide insights into the health of the economy, such as job creation and unemployment rates. In the script, the mention of a quiet week for economic reports implies a week with fewer significant economic data releases, which might influence the stock market less intensely.

💡Recession

A recession is a period of economic decline, typically characterized by a fall in GDP, high unemployment, and a drop in stock values. The script discusses fears of a recession in the US following a weak job creation report, which led to a market sell-off.

💡Earnings

Earnings refer to the profits that a company makes and is a key indicator of a company's financial health. In the script, the discussion of companies reporting earnings, such as Eli Lilly and Novo Nordisk, is significant as it impacts investor decisions and stock valuations.

💡Weight Loss Drug

A weight loss drug is a pharmaceutical product designed to help reduce body weight. The script mentions companies at the forefront of the weight loss drug story, indicating that their financial performance and stock valuations are tied to their success in this market segment.

💡Fair Value Estimate

The 'Fair Value Estimate' is an analyst's projection of what a company's stock is truly worth. In the script, Morning Star's adjustments to the fair value estimates for companies like Microsoft and Amazon after their earnings reports indicate changes in the perceived value of these stocks.

💡Generative AI

Generative AI refers to artificial intelligence systems that can create new content, such as text, images, or music. The script discusses the excitement around generative AI and its potential applications, highlighting its difference from traditional AI that is more about pattern recognition.

💡Nvidia

Nvidia is a company known for its graphics processing units (GPUs), which are crucial for training AI models. The script mentions Nvidia as a leader in providing the infrastructure for AI, with its GPUs being essential for the development of large language models.

💡Data Centers

Data centers are facilities that house and manage large amounts of data. The script discusses the growth of data centers as a significant opportunity for utilities companies, as these centers require substantial electricity to operate.

💡Economic Moat

An 'economic moat' refers to a company's sustainable competitive advantage that protects its market position from competitors. In the script, Morning Star assigns 'narrow economic moat' ratings to certain companies, indicating they have a competitive edge that is expected to last for a decade or more.

💡Undervalued

A stock is considered 'undervalued' when its market price is lower than its estimated fair value, suggesting it may be a good investment. The script mentions several stocks that Morning Star considers undervalued, implying they have potential for price appreciation.

Highlights

The Morning Filter covers important topics for investors, including new Morning Star research and stock ideas.

Economic reports and earnings from companies like Eli Lily and Novo Nordisk are on investors' radar this week.

Despite recent stock pullbacks, Morning Star sees significant price risk for companies at the forefront of weight loss drug stories.

Disney and Paramount are expected to report earnings, with both stocks appearing undervalued.

Several of Dave's stock picks, including Realty Income International, report earnings this week, all undervalued.

Morning Star raised its Fair Value Estimate on Microsoft by more than 12% after positive earnings.

Meta Platforms' Fair Value Estimate was also raised by Morning Star due to solid ad demand and strong cash flow.

Amazon's Fair Value Estimate increased by $3, with the stock now considered undervalued by Morning Star.

Apple's Fair Value Estimate was raised nearly 9%, with forecasts predicting double-digit iPhone revenue growth by 2025.

Berkshire Hathaway sold half of its stake in Apple, which may impact the stock this week.

Morning Star significantly reduced Intel's Fair Value Estimate following a disappointing forecast and stock sell-off.

AI's potential for rapid growth has led to a surge in stocks tied to AI since the launch of Chat GPT.

Generative AI, a subset of AI, creates new content and represents the recent excitement in the field.

AI is currently being infused into existing products rather than being sold as a standalone tool.

Nvidia's GPUs are the market leaders for training AI models, with AMD and Intel as competitors.

Cloud companies may build in-house chips, potentially reducing reliance on Nvidia and impacting its market position.

Utilities are positioned to benefit from the growth of AI, particularly in data center electricity consumption.

Certain utilities, like WEC Energy Group, NYS Source, and Entergy, are expected to see significant earnings growth due to data center demand.

Microsoft is identified as an early leader in AI with investments in Open AI and strong financial health.

Taiwan Semiconductor Manufacturing (TSMC) maintains a significant market share and is expected to have a wide economic moat.

Stock picks based on Morning Star's analysis include Microsoft, TSMC, WEC Energy Group, NYS Source, and Entergy.

Transcripts

[Music]

hello and welcome to the morning filter

I'm Susan jinsky with Morning Star every

Monday on the morning filter we cover

what investors should have on their

Radars this week some new Morning Star

research and a few stock ideas to

research further now my colleague Dave

Sakara is on a well-deserved break this

week so today's episode is going to be a

little different I'll cover some of the

ground that Dave normally does though

I'm certainly no substitute then we'll

share a couple of interviews that Dave

conducted before he left about investing

in AI today and then finally I'll close

out the show with some stock fixed based

on Dave's interviews so let's get to it

what should investors have on their

Radars this week well it'll be a quiet

week in terms of economic reports thank

goodness last week's jobs report showed

weak job creation and the highest

unemployment rate since late 2021 now

that triggered fears of a recession in

the US which triggered a market sell-off

on Friday and by the looks of the

Futures Market before open here on

Monday it looks like the sell-off is

likely to continue at least today

now on the earnings front we have a

couple of companies reporting this week

that have been at the Forefront of the

weight loss drug story and those are Eli

Lily and Novo Nordisk now even though

both stocks pulled back recently they

still look about 50% overvalued heading

in earnings now while morning Stars

healthc care team thinks both companies

have a long runway for growth with their

stable of weight loss and diabetes

treatments they think the market is

overenthusiastic about these stocks and

they see significant price risk here

we'll also be hearing from both Disney

and Paramount this week both stocks look

undervalued heading into earnings mster

senior analyst Matt Dolan covers both

companies with Disney Matt's not

expecting a big quarter of subscriber

ads to the Disney's streaming service

but he is curious to see what inside out

to success at the box office contributes

to results and he's also interested to

see how much Disney's experiences

business has slowed and then over at

Paramount he'll of course be listening

for more details about the sky Dan deal

and finally several of Dave's stock

picks from prior shows report this week

including realy income International

flavors and fragrances fortnet and

Baxter all of which remain undervalued

heading in earnings we'll be listening

to what management from each of these

companies has to say during their

earnings calls now moving on to some new

research from Morning Star I'd like to

run through several notable changes to

the fair value estimates on the stocks

of some big companies that reported

earnings last week let's start with

Microsoft Morning Star raised its Fair

Value Estimate on Microsoft by more than

12% after earnings to

$490 per share Morning Star senior

analyst Dan romanof noted that earnings

came in as expected and he seemed most

impressed with guidance calling for

Azure Revenue to accelerate in the back

half of the year as the company's

investment in Data Center capacity comes

online Microsoft stock has a fourstar

rating today which means Morning Star

thinks it's

undervalued now Morning Star also raised

its Fair Value Estimate a meta platforms

by more than 12% up from $400 per share

to $450 per share now Morning Star

director Mike Hodel observed that solid

ad demand allowed meta to invest

aggressively while generating strong

cash flow Mike was nevertheless happy

that meta maintained and didn't increase

its expense forecast for the year meta

stock is trading in three star range

today and looks fairly valued according

to Morning Star Morning Star also raised

its Fair Value Estimate on Amazon by $3

to

$195 after earnings morning Stars Dan

Romanov thought second quarter results

were solid the change in Fair Value was

influenced by continued enhancements to

profitability in the near term Dan says

the stock is increasingly attractive

after pulling back during the past few

weeks in fact Amazon stock is trading at

four star levels today suggesting that

the stock is

undervalued Morning Star also raised its

Fair Value Estimate on Apple by nearly

9% after earnings to

$185 Morning Star analyst will Kerwin

said in his note that the fair value

boost was due to an increase in morning

star's medium-term iPhone revenue

forecast now Morning Star is forecasting

double- digigit iPhone Revenue growth in

fiscal 2025 as users upgrade their

iPhones to take advantage of Apple's

generative AI features not even at after

that fair value increase Apple stock

looks about 20% overvalued and then on a

somewhat related note news came out this

weekend that Burkshire hathway had sold

about half of its huge stake in Apple

stock last quarter it'll be interesting

to see if that reveal has any impact on

the stock this week and then lastly

Morning Star slashed its Fair Value

Estimate on Intel by 30% to $21 after

the chipmaker provided a disappointing

forecast announced layoffs and paused

its dividend the stock sold off by more

than 25% and Morning Star strategist

Brian kelos called the selloff Justified

and noted that he's concerned about

Intel's competitive positioning after

that earnings report viewers who' like

to read more details about what morning

Stars analysts thought about the

earnings of these companies and of

course others can click on the link

beneath this video to ask access morning

Stars earnings coverage now moving on a

couple of weeks ago Dave sat down with

two of morning Stars strategists to

discuss opportunities in AI his first

conversation was with Brian celo who

covers Nvidia among other tech companies

his second conversation was with Travis

Miller who's a strategist with morning

Stars utilities team let's have a

listen artificial intelligence burst

into the Limelight in November 2022 when

open AI launched chat GPT once investors

saw what AI could do and its potential

for rapid growth stocks tied to AI have

surged to new highs so the question is

what exactly is AI how is it utilized

and who benefits the most and most

importantly where is it going to help me

answer these questions is Brian kalilo

our Equity strategist on the technology

team at Morning Star Research Services

to talk about how AI is currently being

used and where we see it going forward

well Brian thank you for joining us here

thanks for having me so of course you

know large language models have really

garnered you know all the Limelight in

the media today but could you explain

like what is exactly Ai and what are

some of the use cases we see it being

used for today sure so artificial

intelligence has been around quite a

while but the excitement what we've seen

over the past 18 months is really around

generative AI which is a subset of the

broader AI category even if you take AI

as a whole which again has been around

for decades machine learning was a just

a piece of overall Ai and the Machine

learning is really used to sort of

detect patterns in data companies will

feed it data that the humans basically

just can't detect those patterns on

their own so machine learning uh would

Aid in that now within that is a subset

uh called Deep learning and within that

is a subset called generative Ai and

that's where these large language models

come from uh the key Concept in

generative AI which is different from

all the others is that these generative

AI tools these large language models

create new and original content and so

that's something we haven't seen before

okay so for an investor perspective of

course you know the question really

becomes you know how exactly are these

companies going to utilize you know AI

to either one you know generate

additional revenue on top of what

they're already generating you know and

or you know how is it going to make

companies you know more efficient in

order to try and improve their operating

margins sure so the start of AI right

now the winners are the companies

building out the infrastructure so

Nvidia for sure and then the cloud

companies renting out those Nvidia gpus

and those data centers to their

customers so if we put that aside for a

minute we could talk about enterprise

software it's more to your question of

where's the revenue going to come from

how are they going to save so on the

revenue side or you maybe taking a step

back in software we think AI will be

infused in existing products that it

won't necessarily be just an AI tool but

it will be AI baked into the products

we're already using so from a revenue

side for a best case scenario for

software a company will be able to

explicitly upsell AI by selling a

different module or new product

Microsoft co-pilot might be the exact

the best example of this trying to add

on $30 per month per user to to get our

AI tools so that's probably the best

case from a revenue perspective uh the

medium uh scenario in that would be a

software company is able to raise prices

on the product as whole on the whole or

maybe they stay flat maybe they don't

really explicitly charge for AI but it

allows them to retain business maybe

they reduce customer turn um maybe they

hold on to those customers longer you

know the worst case scenario for

software companies are those that don't

develop an AI or subpar and they just

get steamrolled uh by competition later

on so that's what we think will happen

on the revenue side on the efficiency

side we're seeing efficiencies um in

many different places uh computer coding

is one where AI is helping um computer

programmers there uh customer service is

another area just even there's a lot of

concern maybe longterm about job loss

and things like that but even in the

interim if you take your average

customer service representative they're

able to get information on their

fingertips more quickly to better serve

their customers being able to let's say

look through manuals or know where to go

in a software program things like that

so there are advantages to AI being

deployed in those two areas already

making businesses more efficient okay

now when I think about investing in AI

you know there's the old adage you know

during the gold rush you know back in

the day it wasn't necessarily the miners

that got rich but the people that did

get rich were the ones that were selling

you know the PS and the shovels so when

I think of the PS and the shovels today

of course you know Nvidia with its gpus

you know by far the market leader you

know selling you know the chips that are

being used to train the AI models today

so maybe if you could just explain to us

you know what exactly is it about you

know nvidia's gpus that make them the

leader today but I'm also curious you

know who else is out there you know who

else is making you know products in

order to try and do similar types of

things or are there other you know chips

that are being made out there for

specific AI use cases yeah gladly and

you know I've used that analogy as well

that Nvidia you know was basically the

only pick maker in town and they make

the best shovels and they're expanding

into blue jeans and water bottles and

everything that that a minor can use

that I think they're doing a really good

job of elbowing out into other um AI

applications uh this all started Nvidia

I think we've always thought of them as

a best of breed GPU vendor to begin with

probably for the past 20 years but more

so on the gaming side uh with their

technology but sort of the the big bang

moment in the industry was in 2012 when

uh a host of researchers reprogrammed

one of those Invidia gpus and discovered

that you could get far better results

with a large language model running

Nvidia so the first part um I don't want

to call it luck but certainly the GPU

architecture that Nvidia has was well

suited for these large large language

models where Nvidia was really bright

was investing in that um trend for the

past 10 to 15 years on the software side

creating the the software and compilers

and tools and all of the things to help

the AI industry build these large

language models so now they're all built

using Cuda software that is proprietary

that only runs on Nvidia gpus and that's

why they have such a dominant position

today uh in terms of competition AMD has

GPU experience as well both on the

gaming side they're coming out with

their a or they have their AI chips out

to Market not nearly at the size and

scale of Nvidia and the software is

going to be a bit of a challenge but

certainly they want to be the J second

general purpose GPU vendor uh Intel also

has uh AI accelerator chips uh that are

at play there uh we think the biggest

threat to Nvidia over the next few years

will probably be in-house chips built by

the cloud companies themselves so

Microsoft Google Amazon for example if

they can take workloads and run it on

their own chips they can reduce their

Reliance on Nvidia I think they're still

going to buy plenty of Nvidia chips but

to the extent they can uh reduce their

Reliance or even just put pricing

pressure back on Nvidia it'll be a

positive for those companies as well uh

and then outside of that you have

companies like broadcom and Marvel that

are helping the cloud companies build

those in-house chips uh there are other

companies well broadcom and Marvel are

just two of many that are supplying sort

of peripheral chips into like the

networking architecture and then finally

all of these companies there's an entire

supply chain around them so whether it's

Taiwan semi as the world's leading

Foundry building many of these chips or

whether it's arm with the uh

architecture uh and basically the

blueprint for Designing many of these

chips there's a whole ecosystem of semis

that are supporting Nvidia but also

their competitors too great thank you so

thinking about what's coming up you know

and looking forward you know if you

could gaze into your crystal ball you

know today I kind of want end on an

open-ended question here for you you

know but just thinking about you know

maybe over the next you know two or

three years you know how do you really

see you know this developing what are

maybe some of the additional use cases

that investors you know should be

thinking about today yeah gladly I mean

nobody has a great crystal ball on this

I don't even think the cloud companies

do and maybe Nvidia doesn't either to be

perfectly honest so you the big question

we get from Nvidia or from investors

about envidia and others is how long can

the spending keep going uh we would

continue to look at the spending plans

of the hyperscalers the Googles Amazon

Microsoft's metas of the world to

determine um you know how much more

Nvidia we be selling how much more of an

AI buildout is happening because they

would only be doing so if their tens of

thousands of customers are are are

developing AI models or not so that's

what we would look at from a uh revenue

and sort of trend uh perspective uh in

terms of where it's going you know we

talked a little bit about Enterprise

software and how AI will be infused

there uh I do think there are plenty of

startups coming but I do think it's too

early to be expecting significant

revenue from there we've seen some

reports and opinions that you know where

are all the tools there's been

development for two years I I still

think it's a bit too soon you know the

the Ubers and Instagrams of the world

let's say those that might be a five to

10 year Trend until we start seeing

these AI applications one or two years

in might still be a little too early or

at least that's my opinion on it um I

would also say nation states and

government spending is an interesting

sort of trend as well for security and

defense purposes and things like that

and that's spending might happen

completely independent of Revenue um you

know we see that this is the future in

Ai and then finally there are these big

sort of moonshot projects that are going

on where it will take a big piece of R&D

budget and maybe they work out or maybe

they don't but but I think the spending

will be there so things like drug

Discovery genetics um autonomous driving

robotics those are are problems at the

technology industry and Healthcare and a

lot of other Industries haven't cracked

yet and now with all this computing

power they might be able to to move the

ball forward on that and so I think that

spending is going to happen uh again

maybe regardless of Revenue I'm sure

they all want to cure cancer or have

self-driving cars or you know make

billions of dollars off of that but I

think the spending will happen either

way got it well thank you very much I

really appreciate you spending your time

and providing your expertise to us today

happy to

help many types of companies stand to

benefit from the long-term secular

growth in artificial intelligence and

this means that there are opportunities

for investors interested in this theme

beyond the obvious a stock plays like

Nvidia Microsoft and alphabet with me

today is Travis Miller our Equity

strategist on the utilities team at

Morning Star Research Services to

discuss how utilities stand to benefit

from the growth of AI so first Travis

you know thank you for being here with

us today but of course you know the

first question has to be you know why is

there now this recent focus by the

marketplace on utilities as a potential

play on artificial intelligence data

centers are huge electricity consumers

so when you utilities primary business

is supplying either Distributing or

transmitting or generating electricity

data centers and the growth there is

going to be a huge business opportunity

for utilities that means earnings growth

that means more investment in

infrastructure so we think utilities are

a good way to play this data center

growth give you to give you one

interesting example here Texas right now

it's the largest area for Bitcoin mining

Bitcoin mining and the data center is

involved with that alone

equal the same amount of electricity on

a hot summer day in the entire city of

Austin wow that's incredible some grid

operators in Texas are projecting that

generative AI data centers if they grow

in Texas could be 20 times that amount

of electricity so this is a huge growth

opportunity for utilities wow that's uh

really interesting thank you so really

how do you forecast you know the

additional power requirement for you

know artificial intelligence and how do

you really incorporate that into your

own Financial models in order to

determine you know what the proper

valuation of utility should be going

forward sure so we're forecasting about

double demand growth in data center

electricity consumption throughout the

year on an annualized basis now that's

going to be very Regional so only

certain utilities are going to benefit

from that the utilities we think are

going to benefit the most we incorporate

that in our future projections that

flows into our earnings growth

projections and ultimately in our

valuation so utilities we think that are

going to benefit from data center demand

growth do get a premium valuation

relative to the rest of the group all

right well then let's name some names

you know which ones should investors you

know keep on their short list to watch

in the marketplace today for you know

any potential sell-offs or ones you know

that might be undervalued you know going

forward yeah we like three in particular

so w Energy Group it's a Wisconsin

utility NYS source and its subsidiary in

Indiana and also enty which is located

in the Gulf Coast all three of those are

huge centers for demand growth from data

centers right now what we've seen in

Wisconsin is data centers that Microsoft

has planned could increase electricity

demand in Wisconsin by 10% the entire

State relative to one Microsoft data

center development in Northwest Indiana

the utility their nsource has projected

that one or two data centers could

double the amount of demand in Northwest

Indiana an entg or earlier this year got

a commitment from Amazon web services

for A10 billion facility we think that

could lead to a 10% or more increase in

entergy's capital investment growth plan

so all three of those were projecting

higher than average earnings growth

because of the data center demand and we

think that could continue for a decade

or more giving them a higher valuation

relative to the group wow that's some

really interesting growth especially for

a sector that you always have been

considering a very slow bit study you

know earnings grower so thank you very

much for your time really appreciate

your Insight sure thank

you it's time to move on to the pics

portion of this week's program this

week's pics are some of the names that

Dave talked about in his interviews with

Brian and Travis now we're focusing on

stocks that score well on three marks

first they're undervalued according to

Morning Star which means they carry Less

Price risk today second the companies

have somewhat reliable cash flows as

measured by their medium or low Morning

Star uncertainty scores and then finally

they've carved out economic Moes which

means Morning Star expects these

companies to remain competitive for a

decade or longer so the first pick this

week is Microsoft which has clearly

emerged as an early leader in AI with

its investment in open AI the company is

in excellent Financial Health has pretty

reliable cash flows and Morning Star

thinks Microsoft will continue to

strengthen its already wide economic

mode Morning Star is Morning Star

Microsoft is an all-around attractive

core holding and it looks about 177%

undervalued relative to our Fair Value

Estimate our second stock pick this week

is Taiwan semiconductor manufacturing

now tsmc is the world's largest

dedicated chip Foundry and maintains

more than a 60% market share now Morning

Star thinks the company has carved out a

wide economic mope second quarter

earnings and third quarter forecasts

were in line with our F year estimates

now morning Stars analyst says that

negative recent news like US

presidential candidate Donald Trump's

remarks on Taiwan and reports on

possible new export restrictions should

really have limited direct impact on

tsmc's operations as most of its direct

customers are from the US or Taiwan the

stock looks 30% undervalue today now the

last three picks this week are some of

the second derivative plays that Dave

talked about with Travis the first is we

Energy Group now we think this utility

should trade at a premium to other

utilities due to its above average

earnings growth and the constructive

regulatory environments in which it

operates

also uh wec announced oh Microsoft

announced additional land purchases in

southeastern Wisconsin indicating

further data center development which

will Ben benefit we we assigned the

utility a narrow economic moat rating

the stock offers a nice yield above 3

and a half% and looks about 6%

undervalued NYS source is the second

second derivative AI pick like wec

nisource will also benefit from

Microsoft's data center plans but this

data center will be in leaport Indiana

which lies within nipsco's territory NYS

Source also earns a narrow economic moat

rating the stock yields more than 3% and

is 6% undervalued relative to morning

Stars Fair Value Estimate and our final

stock pick this week is Entergy Morning

Star assigns Entergy a narrow economic

moat rating we're projecting 7% annual

earnings growth at least through 2029 on

the back of accelerating electricity

demand from data center development in

Energy's Gulf Coast service area the

stock is just 4% undervalued and yields

more than 3 and a

half% viewers interested in researching

any of the stocks that we discuss on the

morning filter can visit morningstar.com

for more analysis I hope you'll join me

for the morning filter again next Monday

at 9:00 a.m. eastern 8:00 a.m. Central

in the meantime please like this video

And subscribe to morning Stars Channel

have a great week

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