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Author: Gao Zhimou

In the past six months, fluctuations in AI-related stocks have intensified. After a recent rebound, Goldman Sachs pointed out in its latest research report that AI "second stage" trades will tend to mature, and investors need to carefully consider investing in the "third stage".

Six months ago, we quoted Goldman Sachs' "four-stage theory" on AI investment in an article. Among them, as the most clear beneficiary of AI, NVIDIA belongs to the "first stage", the "second stage" includes companies focusing on AI infrastructure, the "third stage" focuses on companies with the potential to monetize AI through generating incremental revenue, and the "fourth stage" primarily consists of companies with the greatest potential profit enhancement in widespread AI adoption and productivity improvement.

Goldman Sachs believes that the current investment focus is on the infrastructure of the second stage. Such stocks, typical of this category, have risen by 27% so far this year, with valuations exceeding the 10-year average by 0.4 standard deviations, gradually entering an overvalued stage. Goldman Sachs warns that the future growth of stocks in this stage may rely more on actual profit performance rather than further valuation increases:

We expect the second stage of trading to mature, with stock price increases being driven by profit growth rather than valuation expansion.

Starting valuations are above average, nvidia's sales exceed expectations, the capital expenditure of large-scale cloud computing service providers exceeds expectations, and the frequency of enterprises mentioning AI growth has slowed.

The upcoming third-quarter earnings season will be an important test.

For AI application stocks in the third stage with the potential to generate incremental revenue, goldman sachs recommends caution. However, goldman sachs believes that in this stage, "platform" type stocks demonstrate strong investment attractiveness:

Although valuations are below average, the timing for AI application implementation and monetization remains uncertain.

Investors confident in the future development stages of AI can choose some "platform" type stocks.

Second Stage: Growth Challenges in Overvalued Stock

Currently, investment hotspots are mainly focused on infrastructure stocks in the second stage. These stocks have risen by 27% this year, with valuations exceeding the 10-year average by 0.4 standard deviations.

Among them, the large-scale AI investments of technology giants are important factors supporting these stocks.$Amazon (AMZN.US)$and$Alphabet-A (GOOGL.US)$Please use your Futubull account to access the feature.$Meta Platforms (META.US)$N/A.$Microsoft (MSFT.US)$And.$Oracle (ORCL.US)$As technology giants announce large-scale AI-related investments, capital expenditures are expected to reach $215 billion and $250 billion in 2024 and 2025 respectively, with a significant portion related to AI.

However, high valuations also bring growth challenges. A Goldman Sachs analyst pointed out that the future growth of these stocks may be more dependent on actual profit performance rather than further valuation increases:

We believe there is still room for upward movement in second-phase stocks, but future gains will be more driven by earnings growth rather than valuation increases.

Currently, the stock prices of these stocks have exceeded expected earnings per share, reflecting investors' optimistic expectations for the potential of AI. Some second-phase stocks have recently risen due to bullish AI news (such as increased shipments from AMD,$Constellation Energy (CEG.US)$signing nuclear energy agreements with Microsoft, etc.).

However, due to the high initial valuation, future returns may be limited, even though the predictive ability of valuations for large cap stocks in the short term is limited.

It is worth mentioning that the company also mentioned in the report that the magnitude of AI spending exceeding expectations is narrowing, and the frequency of mentioning AI by enterprises is stabilizing, which may imply that the future increase in the second phase of stocks may be more moderate:

The magnitude of AI spending exceeding expectations is narrowing, implying that the future increase in the second phase of stocks may be more moderate. Although the current valuation is slightly high, if the AI investment of technology giants exceeds expectations, it may still drive stock prices up. In early 2023, NVIDIA's chip demand greatly exceeded expectations, and cloud giants' capital expenditures expectations continue to rise in the first half of 2024. However, these unexpected magnitudes are narrowing recently. The upcoming third quarter report will be a critical test.

Similarly, although the frequency of mentioning AI by enterprises and the willingness of management to spend on IT are still higher than historical levels, they have stabilized. The proportion of companies mentioning AI in the second quarter of 2024 is slightly lower than in the first quarter. Our IT spending survey in September also shows a slight decrease in spending willingness compared to January.

Phase III: Selecting AI application stocks carefully

Currently, AI application stocks in the third phase are trading sideways, with valuations below the average. However, Goldman Sachs believes that the timing for AI application development and monetization remains uncertain, making it difficult to fully deploy in the short term:

Based on our discussions with investors and recent stock performance, most of the third phase stocks with potential AI-enabled revenue have not been able to meet expectations in application development and monetization. We expect this uncertainty to persist in the short term.

According to Goldman Sachs' IT spending survey, management expects only 3% of next year's IT budget to be allocated to generative AI. By 2025, the willingness to spend on AI products may improve, as by then management will have a clearer understanding of the direction of Federal Reserve policy and election results.

However, the company believes that during this stage, "platform" type stocks demonstrate strong investment appeal:

"Platform" type stocks may represent an attractive subset in the third stage of stocks.

Our analysts believe that "platform" type stocks, including databases and development tools, will be the main beneficiaries of the next wave of generative AI investments.

These platforms can maximize AI infrastructure and provide basic modules for building next-generation applications.

Stage Four: Still Awaits Time

For stage four stocks, companies expected to achieve maximum productivity gains from widespread AI applications, Goldman Sachs analysts believe that it will take time for their performance to shine.

Data shows that only 6% of enterprises currently use generative AI in production, a proportion far lower than market expectations. Goldman Sachs analysts point out that investors may only gain confidence in these types of stocks once substantial progress has been made in the widespread adoption of AI applications in the third stage:

We believe that the launch of applications in the third stage of stocks is a necessary condition for investors to have confidence in owning stage four stocks (those stocks with the greatest potential profit growth due to AI-related productivity gains).

Editor/Jeffy