Despite a skeptical outlook on artificial intelligence, Goldman Sach's head of global equity research still rates Nvidia, cloud computing companies and AI infrastructure plays as possible buys. But top Goldman analyst Jim Covello warned in a "Top of Mind" report that investor sentiment on AI stocks could turn negative.
In the report published Tuesday, Covello favors Nvidia stock, "utilities and other companies exposed to the coming buildout of the power grid to support AI technology, and the (cloud) hyperscalers, which are spending substantial money themselves but will also garner incremental revenue from the AI buildout."
However, Covello cast doubt on artificial intelligence solving critical business problems and companies getting a return on AI investment — which Goldman Sachs estimated will be over $1 trillion "in coming years."
AI Stocks: Comparison To Dot.com Bubble
"The bursting of today's AI bubble may not prove as problematic as the bursting of the dot-com bubble simply because many companies spending money today are better capitalized than the companies spending money back then," Covello said.
"But if AI technology ends up having fewer use cases and lower adoption than consensus currently expects, it's hard to imagine that won't be problematic for many companies spending on the technology today. That said, one of the most important lessons I've learned over the past three decades is that bubbles can take a long time to burst. That's why I recommend remaining invested in AI infrastructure providers."
In the "Top of Mind" report, Covello added: "How long investors will remain satisfied with the mantra that 'if you build it, they will come' remains an open question. The more time that passes without significant AI applications, the more challenging the AI story will become. And my guess is that if important use cases don't start to become more apparent in the next 12 to 18 months, investor enthusiasm may begin to fade."
Nvidia Stock A Bellwether
A bellwether for AI stocks, chipmaker Nvidia's shares have jumped 154% in 2024. Nvidia stock surged 239% last year. In June, Nvidia became the world's largest public company. NVDA stock hit a market valuation of $3.33 trillion.
However, Nvidia stock reversed off record highs in heavy-volume last week. Nvidia stock rebounded on Tuesday. On Wednesday, Nvidia stock edged up 0.3% to close at 126.40.
So far, the biggest demand for AI chips has come from cloud computing giants and internet companies. For chipmakers, analysts expect a market for "edge AI" — on-device processing of AI apps to emerge.
Apple is among AI stocks to watch. "Apple Intelligence" features could spur a major iPhone 16 upgrade cycle in late 2024. New AI features will only be available on the iPhone 15 Pro/Pro Max and upcoming iPhone 16 models.
Further, Microsoft is the biggest investor in startup OpenAI, the leader in generative AI. What's more, OpenAI has told employees its now on an annual revenue run-rate of $3.4 billion, up from $2 billion in January.
AI Stocks: Cloud Computing Giants
Cloud computing giants Amazon.com, Microsoft and Alphabet's Google are spending heavily to expand data center capacity for artificial intelligence workloads.
In a summary of Covello's views, the Goldman Sachs report said "(Covello) argues that to earn an adequate return on the $1 trillion estimated cost of developing and running AI technology, it must be able to solve complex problems. But he says, it isn't built to do. He points out that truly life-changing inventions like the internet enabled low-cost solutions to disrupt high-cost solutions even in its infancy, unlike costly AI tech today."
While Nvidia stock has soared, the Goldman Sachs report noted that application software makers in the enterprise market have lagged in monetizing generative AI products.
The Goldman Sachs report also said: "(Covello is) skeptical that AI's costs will ever decline enough to make automating a large share of tasks affordable given the high starting point as well as the complexity of building critical inputs — like GPU chips — which may prevent competition. He's also doubtful that AI will boost the valuation of companies that use the tech, as any efficiency gains would likely be competed away. (Also) the path to actually boosting revenues is unclear, in his view. And, he questions whether models trained on historical data will ever be able to replicate humans' most valuable capabilities."
Follow Reinhardt Krause on Twitter @reinhardtk_tech for updates on artificial intelligence, cybersecurity and cloud computing.
