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Goldman Sachs says the recent surge in artificial intelligence stocks is not just hype but is driven by genuine potential in the new technology. Generative AI, a form of AI that can create new content and interact with humans in their natural language, has seen a significant uptick in interest since the release of ChatGPT late last year. Investor enthusiasm for the technology has meant exchange-traded funds, such as Global X Robotics and Artificial Intelligence , have rallied this year. In addition to naming the stocks exposed to this theme, the Wall Street bank’s analysts said investors were focused on the technology due to its potential to lift personal and professional productivity worldwide. “AI probably isn’t in a hype cycle. For one thing, this technology cycle isn’t being led by upstarts, which makes it less likely to fizzle out or take a long time to get going,” said Kash Rangan, Goldman’s senior software equity research analyst, in a note to clients on July 5. The analyst said this was because the developments were being led by some of the world’s most influential tech companies, like Microsoft and Google , and not by new players. This contrasts to previous technology cycles that experienced resistance from larger, established firms, leading to more extended adoption periods, they added. Rising valuations While many investors have accepted the transformative nature of the technology, others have grown skeptical over the rising valuations tacked to the companies in the sector. Goldman’s analysts dismissed some of those concerns and said companies like Nvidia and Microsoft are still trading at reasonable multiples. “Bubbles are typically about enterprise value to eyeballs/clicks, addressable market dynamics, or sheer euphoria as a driver of valuations as opposed to what the right multiple on net income is to pay,” said Eric Sheridan, senior internet equity analyst at the investment bank. Nvidia shares soared 190% in the first half of 2023, lifting the 30-year-old company’s market cap past $1 trillion. That milestone was achieved after the company revealed that it had beaten analysts’ expectations on revenue for the first quarter. In addition, Nvidia said it expected sales of about $11 billion in the second quarter , more than 50% higher than Wall Street estimates of $7.15 billion. More broadly, Sheridan also predicted that companies would begin to experience AI’s productivity-enhancing potential internally over the next six to 12 months, with external business applications emerging over a three-year horizon. For the moment, the analyst said productivity benefits were concentrated at the developer level. Still, it said software giants Salesforce and Adobe are gearing up to offer solutions that will benefit sales, marketing, and customer support professionals by 2024. Stocks exposed to A.I. The analysts also highlighted stocks exposed to the AI trend, including Microsoft , Alphabet , and Amazon , leveraging their vast computing infrastructures to commercialize AI on a grand scale. They added that Nvidia , Marvell Technology , TSMC , Foxconn Industrial Internet, Unimicron Technology , and NYPCB were critical to the AI theme as they manufacture the crucial semiconductors and related equipment needed to enable the technology. For example, sales of Marvell’s optical PAM4 digital signal processors enabling high-bandwidth optical connectivity for AI platforms were critical to its latest quarterly earnings, it said. According to Goldman Sachs, companies like Meta Platforms, Salesforce, Adobe, ServiceNow, Intuit, Capgemini, Pearson, London Stock Exchange Group, and Relay Therapeutics were also exposed to the AI theme. The investment bank’s analyst said these businesses leverage AI to make their operations more efficient. For instance, Meta Platforms has been investing in AI to enable content moderation on its social media networks.
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