According to Goldman Sachs Group Inc. (NYSE:GS) strategists, the early winners in artificial intelligence (AI) not only possess strong fundamentals but also have valuations that are less extreme compared to stocks seen in previous periods of exuberance. This insight from Goldman Sachs rebuts concerns about a potential bubble forming in the AI industry.
As AI continues to advance and shape various sectors, these companies are positioning themselves as leaders in this transformative technology. Their robust foundation and moderate valuations indicate a level of stability and potential for growth in the AI market. By leveraging their expertise and innovative approaches, these early winners are poised to capitalize on the immense value that AI brings to the table.
“We believe we are still in the relatively early stages of a new technology cycle that is likely to lead to further outperformance,” emphasized Goldman strategists, led by Peter Oppenheimer, in their note (via Bberg) titled “Why AI Is Not a Bubble.”
Contrary to past tech bubbles, stocks leading the AI rally are trading at significantly lower levels. Additionally, Oppenheimer highlighted that today’s AI companies are already profitable and generating cash. This indicates a strong foundation and sound business fundamentals within the AI sector.
The release of ChatGPT in the past year has ignited a surge in demand for generative AI, as industries spanning from banking to education to entertainment recognize its disruptive potential. Citigroup Inc. (NYSE:C) strategists anticipate that the impact of AI will be widespread across businesses within a short span of two years, positioning it as the “new growth thing” in the stock market.
This surge of interest and excitement has sparked a race to identify the early winners in the AI landscape. One standout example is chipmaker Nvidia Corp. (NASDAQ:NVDA), whose shares have risen by more than 230% year-to-date. Drawing upon their expertise, Goldman’s analysts have curated a selection of companies that exhibit significant long-term potential for boosting earnings per share through AI. Their analysis suggests that the median stock within this index could witness a remarkable 72% growth in profits compared to a baseline scenario.
Goldman Sachs’ optimistic outlook contrasts though with the more cautious stance adopted by other investment banks. Strategists at Bank of America (NYSE:BAC) have cautioned that AI alone will not shield technology stocks from the effects of persistently high interest rates, while Morgan Stanley (NYSE:MS) has suggested that the market bubble is approaching its zenith.
According to Goldman, a key challenge lies in determining the true value of the benefits derived from AI, alongside the task of identifying the winners and losers.
“Given the valuations of the dominant incumbent companies are high but not excessive, we believe we are still generally in the first phase of a typical technology wave,” the strategists wrote, noting that “[i]f this is the case, it suggests there will be further emergence of new entrants in the space and still higher valuations in this part of the market.”
Goldman’s Oppenheimer accurately predicted the stock market downturn last year. However, his belief in June that the stock rally of 2023 would be limited by higher interest rates and valuations has not yet come to fruition.
Reference: Bloomberg
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