Morgan Stanley’s favorite AI stock is 92% exposed to the $1.6 trillion buildout it’s bullish on

A new report from Morgan Stanley highlights Nvidia as the leading AI stock with 91.7% of its projected 2027 revenue tied to AI infrastructure demand. No other company on the bank's list comes close to matching this concentration. The same report ranks Nvidia as the top risk/reward play in the sector.

Nvidia's strong position is attributed to its pervasive role in the AI infrastructure buildout, estimated to reach $1.6 trillion in 2027, up 60% from $980 billion in 2023. This spending accounts for about 25% of S&P 500 revenue growth in 2027, with nearly $700 billion flowing to Nvidia.

The bank's positive outlook is based on several key factors. First, Nvidia's stock trades at an attractive multiple of 15 times fiscal 2028 earnings, with potential for multiple expansion as revenue continues to rise. Second, the bank expects the spending to generate returns of 25% to 50% on invested capital. Lastly, the report suggests that Wall Street may have underestimated compute cycles by 38%, based on historical tech cycles like PCs, the internet, mobile, and cloud.

However, there are several risks that could impact Nvidia's growth. The largest concern is the cash-flow deficit projected for 2027, which could lead to increased debt. Additionally, hyperscalers have already issued about $255 billion in unsecured bonds this year, representing roughly 30% of estimated 2026 spending. This high level of leverage could make it challenging for companies like Amazon, Alphabet, Meta, and Microsoft to service their debt if borrowing costs rise.

Other risks include rising component prices, a shortage of power to support data centers, and potential political barriers such as data-center restrictions and tax breaks. The bank notes that these issues could lead to disruption in the supply chain, particularly for smaller, more expensive components like memory and optics.

Despite the risks, Morgan Stanley maintains that Nvidia is undervalued relative to its growth prospects. The bank expects Nvidia to capture a larger share of hyperscaler spending, with its growth rate expected to accelerate from 18% in 2026 to 16% in 2027.