Goldman Sachs Maps the AI Investment Journey: Profitability Takes Center Stage in Phase Two
AInvestSaturday, Oct 12, 2024 5:00 am ET
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Goldman Sachs has categorized AI-related investments into four distinct phases, emphasizing that the current AI trading landscape has transitioned into the second stage. This phase shifts focus from mere valuation appreciation to company profitability as the primary driver for market performance.

During the initial phase, hardware providers, notably NVIDIA, dominated AI trading. However, as the market matures, infrastructure companies, including semiconductor firms, cloud service providers, data centers, equipment manufacturers, and utilities, have taken the lead, marking the transition to the second phase.

These firms are benefitting from increased capital expenditure on AI, with some infrastructure stocks having risen by over 27% year-to-date as of 2024. Goldman Sachs anticipates these stocks could continue appreciating, driven by profitability rather than purely by valuation expansion, reflecting the sector's optimistic outlook.

Nonetheless, expectations for AI-related expenditures are moderating, suggesting more measured returns in this phase. Still, there remains potential for significant AI-related CAPEX from major tech firms, surpassing projections.

Looking ahead to the third phase, the focus will be on companies aiming to monetize AI through software and IT services. Despite lower valuations, business commercialization in AI applications faces challenges, with only a small fraction of IT budgets projected for generative AI development by 2024.

This underlines the difficulty in achieving AI-driven revenue growth in the short term, requiring patience from investors. However, platform companies like Microsoft, MongoDB, and Datadog are well-positioned to capitalize on AI infrastructure, potentially standing out in this phase.

The fourth phase envisions companies significantly enhancing productivity through AI, though widespread adoption remains years away. Only a small percentage currently use generative AI in production, with notable industry differences in adoption rates.

Companies are poised for substantial future gains once AI applications become commercially viable at scale. Although the fourth phase promises significant growth potential, tangible performance improvements may not be imminent.

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