Nvidia Stock and 8 More AI Plays Benefitting From Microsoft Earnings

Strong data-center spending means higher sales for companies including Nvidia, AMD, and Vertiv. (NYSE)

A host of stocks gained as a result of Meta Platforms’ and Microsoft’s earnings releases.

Meta and Microsoft both reported strong earnings, but the key was that they both will continue capital investments at a rapid rate. Meta’s capital expenditures for the second quarter was $16.5 billion, which more than doubled from a year ago. The company lifted the lower end of its full year capex guidance to $66 billion from $64 billion; the top end is $72 billion.

Microsoft’s capex for the quarter was $17.1 billion, up 23% year over year. The kicker, though, was that management guided for over $30 billion of capex for the third quarter, more than 60% above what analysts had forecast before the earnings release, according to FactSet. Microsoft Chief Financial Officer Amy Hood said on the earnings call that capex is “driven by the continued strong demand signals we see.”

Those demand signals are from the company’s booming cloud business, partly driven by its Azure product’s artificial intelligence component. Microsoft has to continue to build out its data centers to deliver the type of software product its customers need.

The higher-than-expected data-center spending means higher sales for all the companies that sell hardware products to data-center builders such as Microsoft and Meta.

That’s why Nvidia stock was up over 1% Wednesday just after the open. Shares of peer AI chip firms Advanced Micro Devices were up over 1%, and Broadcom were slightly higher, before dipping into the red.

But Vertiv Holdings, which makes power and cooling equipment and sees the majority of its sales from data-center customers, saw stock jump more than 3%. Peer Eaton, which sees less than half—but a double-digit percentage—of its sales from data centers, saw its stock gain more than 1%. Carrier Global, which makes HVACs for the data center was up more than 1%. Johnson Controls, which makes HVAC among other building products, and sees about a tenth of its sales from data centers, saw its stock rise over 2%.

Elsewhere, Arista Networks, which makes switches and routers and sees much of its sales from data centers, was up more than 2%. Shares of Amphenol, which makes connectors for devices across sectors, and sees some sales from data centers, were up over 1%.

A key takeaway is that as long as AI and data-center spending is in high-growth mode, these companies will also be in high-growth mode, supporting their shares. Many technology and industrial investors are now sitting on large gains—great news for all sorts of investors.

The flip side: The gains for some stocks are waning. Most of these stocks are already up by double-digit percentages in the past year, with some of them almost doubling. The only stock that isn’t materially higher in the past year is Carrier, which has dealt with concerns unrelated to the data center. Many of them have already reported second-quarter earnings, demonstrating faster-than-expected growth in their data-center segments.

That’s why some of them are seeing their gains moderate after their initial bursts higher Wednesday. Vertiv stock could conceivably be higher than it is. Remember, Microsoft’s capex came in 12% above expectations, which could provide a similar, albeit slightly lesser, bump to sales. Holding its costs constant, profit margins would be larger, sending the market’s earnings expectations up even more than sales. But Vertiv, like many of these stocks, has already seen large gains, which could explain why the stock isn’t going to the moon Wednesday.

So it’s nice for investors to enjoy the gains while they last, but remember, the rally might have to cool down moving forward.

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com