2 AI Stocks Poised for Outperformance Over the Next 5 Years
Morgan Stanley identifies Microsoft and AMD as two AI stocks poised for outperformance over the next five years. Microsoft benefits from robust cloud demand, surging AI recurring revenue, and massive cash flow funding data center expansion, trading at a reasonable P/E. AMD is positioned to capitalize on growing AI inference demand for CPUs and GPUs, with strong server revenue growth and market share gains against Intel, despite a high valuation.
The tech-centric Nasdaq-100 has outperformed the S&P 500 (^GSPC 0.51%) over the last one-, five-, and 10-year periods. The growing adoption of artificial intelligence (AI) is a long-term tailwind for this streak to continue. Morgan Stanley sees data center construction becoming a global force in economic expansion, with spending expected to reach nearly $3 trillion by 2028.
Two stocks that will benefit from this growth are Microsoft (MSFT +1.26%) and Advanced Micro Devices (AMD 5.59%). Here's why these stocks can outperform over the next five years.
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1. Microsoft
Microsoft stock has fallen 30% from its recent highs, creating a timely buying opportunity. Demand for the software giant's cloud and Copilot services remains robust.
Its annual recurring revenue from AI surged 123% year over year to $37 billion, while Microsoft 365 commercial cloud revenue is also showing strong growth. The company's remaining performance obligations doubled over the year-ago quarter to $627 billion, with 25% of that backlog expected to be earned in the next 12 months.
NASDAQ: MSFT
Key Data Points
To deliver on the rest of its growing backlog, Microsoft is on track to double its data center capacity over the next two years. Wall Street might be concerned about near-term earnings pressure from additional capital spending, but management said these assets are expected to generate returns over a longer time frame, in the next five to 15 years.
The leading hyperscalers are well positioned to deliver long-term returns for investors thanks to their massive data center infrastructure. This is a strategic advantage in an AI-driven economy that Wall Street is underestimating.
Microsoft has the resources it needs to invest in technology, generating a whopping $170 billion in cash flow from operations over the last year. This ultimately funds investment in expanding compute capacity and designing its custom Maia AI chips, among other initiatives.
There are risks, including near-term weakness in the consumer PC market due to high memory costs. The company is expected to spend roughly $190 billion on capital expenditures this year, which may weigh on its earnings and free cash flow.
Still, the stock trades at a reasonable forward price-to-earnings (P/E) ratio of 20, while analysts project earnings to grow at an annualized rate of 16% in the next several years. This is an attractive valuation relative to expected growth, which could set the stage for superior returns.
2. Advanced Micro Devices
Shares of Advanced Micro Devices have surged 157% year to date, but this could be the start of a longer bull run through the end of the decade. This chip company could see substantial growth driven by demand for AI inference.
Demand for inference has become more pronounced since the beginning of the year, with the launch of new agentic AI tools like OpenClaw and Anthropic's Claude Cowork. Inference requires more central processing units (CPUs) to handle certain compute tasks, opening a huge opportunity for AMD.
AMD offers a range of CPUs, from 8-core to more advanced 256-core designs, that can meet customer needs at relatively low cost. Its server CPU revenue grew more than 50% year over year in the first quarter.
NASDAQ: AMD
Key Data Points
AMD has been gaining share on Intel in the server CPU market for several years, and management reported that share gains accelerated in the quarter. This partly reflected a strong ramp for AMD's next-generation EPYC Turin CPUs.
What's more, AMD could see accelerating demand for its data center graphics processing units (GPUs). It acquired ZT Systems in 2025, which bolstered AMD's capabilities in designing complete rack systems for data centers, similar to Nvidia. Shipments for AMD's new Helios rack-scale architecture are expected to begin in the second half of 2026. Even before Helios ramps up, AMD's data center revenue is already strong, up 57% year over year in Q1.
Weaknesses in AMD's gaming and consumer PC business are near-term headwinds, but this will likely be overshadowed by growing demand from enterprise and cloud.
While AMD shares trade at a high 74x forward P/E, it could see robust earnings growth. Analysts expect earnings to grow about 59% annually over the coming years. That sets the stage for market-beating returns.
