A Framework for Understanding AI Investments
By Ian Mahmud, Principal
Whether you are a skeptic or an optimist about the technology, artificial intelligence (AI) is already having an impact on your investments. Stock markets, bond markets and private markets are being influenced by AI technology and corresponding sentiment. In our view, the best way to understand these dynamics is through simplified framing. Public AI investments can generally be bucketed into four categories: 1) The “Builders,” 2) the “Suppliers,” 3) the “Enablers” and 4) the “Long-Run Beneficiaries & Victims.”
Rather than chase trends or market excitement, our investment strategy remains consistent. Broadly speaking, we want to buy the stocks of industry-leading companies with strong expected long-run earnings growth. Some companies in these buckets have met our criteria, while others have not.
The Builders
The Builders are companies that are investing the most in the development of artificial intelligence. These companies are the “hyperscalers” and include Microsoft, Amazon, Alphabet (Google), Meta and Oracle. Overall investment by these five companies alone in 2025, as measured by total capital expenditure and finance leases related to cloud and AI infrastructure, was roughly $450 billion. Assuming approximately the same growth rate in 2026, spending would rise to $770 billion. To put these figures into perspective, the GDP (the value of final goods and services produced in the country in a year) of Norway was approximately $530 billion in 2025.
Most of this capital expenditure relates to the construction of data centers which serve as the core infrastructure of artificial intelligence. More specifically, purchases include land, construction, chips (GPUs and CPUs), servers, cooling systems, and networking equipment.
The performance of these companies as equity investments so far this year has largely depended on how much of their spend could be supported with operating cash flow. The stocks of Alphabet (GOOGL) and Amazon (AMZN) have done relatively well this year, while Meta (META) and Oracle (ORCL) have done less well. Microsoft’s (MSFT) poor performance likely relates more to concerns about AI disruption to its core software business. In our view, the future performance of the stocks of these companies will depend on how well they are able to translate their AI investment into earnings.
The Suppliers
The Suppliers are the companies which are selling directly to the Builders (and other companies) investing in AI. These companies include Nvidia and Broadcom. Nvidia sells GPUs (graphics processing units). GPUs, which are specialized chips designed to perform many calculations at the same time, in this context can perhaps best be thought of as the brains of data centers. Broadcom sells custom AI accelerators (specialized chips for AI workloads) and networking semiconductors used in data centers.
These companies have benefited from the capital expenditure by the “Builders.” Historically, the “Suppliers” have been more cyclical – but the more persistent demand from the data center buildout has changed these businesses and how they are valued. Nvidia grew its revenue 85% year-over-year in its most recent quarter (MRQ) to $81.6 billion. Of this, $75.2 billion is attributable to data centers. As of the time of writing, Nvidia and Broadcom are now the 1st and 6th most valuable companies in the S&P 500 today by market capitalization (total equity value), reflecting their importance in the American economy and continued investor excitement about their prospects.
The performance of the stocks in this category will be driven by the companies’ ability to continue to build on their success - by continuing to deliver growth and/or by building sustainable businesses around the ecosystems they have created.
The Enablers
The Enablers are the companies providing technology that is used for building and designing the product sold by the Suppliers. These companies include Applied Materials (AMAT) and Lam Research (LRCX). These companies produce specialized equipment for the manufacture of semiconductors including GPUs. We also think of companies like Caterpillar (CAT), which sell the construction equipment used for building data centers, as in this category.
The Long-Run Beneficiaries and Victims
The final category includes all of the companies that can make use of AI to improve their revenue growth or profit margins. Accelerated revenue growth might be driven by better targeted advertisement or faster AI-enabled product development. Margin improvement might be driven by, for example, improved logistics or better inventory management as a result of AI capabilities. Companies may also be able to reduce headcount as AI is able to perform certain functions previously handled by human workers. Beneficiaries can be companies in any industry.
The victims are companies that provide services that could become irrelevant given new AI capabilities. This concern is why the launch of new AI tools has had such a big impact on the stock market. While the debate continues, the market appears to be betting certain software companies are the first on that list.
Conclusion
At some point, inevitably, the growth of data centers will slow. Before then, it is also possible that new discoveries about AI could fundamentally change expectations about the technology. For example, new computational advances could mean that less investment than expected is needed for data centers (potentially as a result of users running AI models locally on their own devices). To use a historical analogy, much of the work performed by supercomputers in the ‘80s migrated to much smaller and cheaper personal devices. We will also learn more about the whole industry if OpenAI and Anthropic go public.
We are bullish on AI’s long-term potential. It is true that pushback on the development of AI is emerging (for environmental, social and political reasons) and its impact by use case has varied. However, AI has the ability to deliver improved business profitability, and that has been an inexorable driver of change for American companies for many decades. Applying our strategy stated earlier to the investment landscape today: we continue to focus on companies which have track records of successfully dealing with technological change and/or have developed best-in-class technology which has many potential applications.
If you have any questions about this topic, reach us any time at (833) 888-0534 x2 or info@westbranchcapital.com
The views and information contained in this article and on this website are those of West Branch Capital LLC and are provided for general information. The information herein should not serve as the sole determining factor for making legal, tax, or investment decisions. All information is obtained from sources believed to be reliable, but West Branch Capital LLC does not guarantee its reliability. West Branch Capital LLC is not an attorney, accountant or actuary and does not provide legal, tax, accounting or actuarial advice.
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