Artificial intelligence stocks are surging, with giants like Nvidia and Microsoft driving the market to new heights. However, Goldman Sachs cautions that for these companies to sustain their high valuations, they must eventually demonstrate tangible results from their substantial investments.
The investment bank highlights that Amazon, Meta, Microsoft, and Alphabet have collectively invested $357 billion in capital expenditures and research and development over the past year. A significant portion of this massive sum has been directed towards AI, according to Goldman.
The report, authored by a team led by Ryan Hammond, is closely monitoring downward revenue revisions for signs that AI investments might not be yielding expected returns. If these results fall short, Goldman anticipates potential stock declines for these leading tech firms.
“Today’s hyperscalers will eventually need to prove that their investments are translating into revenues and earnings,” the analysts noted. “Early indicators of negative sales revisions could lead to a revaluation of these companies.”
Goldman also mentions growing concerns among investors about the return on AI investments for these tech giants.
“Despite the popularity of mega-cap tech stocks, investors are uncertain about the returns from their AI investments,” the analysts wrote. “Even long-term optimists about AI’s potential are unsure about the timeline for significant gains.”
Additionally, Goldman points out that only 5% of companies are currently utilizing AI to produce goods and services, based on one of their metrics.
Nevertheless, the gap between capital spending and actual sales and profit is less severe now compared to previous periods of perceived excess.
“Adjusted for the profits of these companies, the current AI investment cycle is not as extreme as the tech bubble,” the analysts concluded.