The next step in the artificial intelligence boom is starting to take shape, and some of the stocks involved may still be cheap relative to their potential, according to Goldman Sachs. Ryan Hammond of Goldman’s Portfolio Strategy Research team said in a March 14 note to clients that even though high valuations are making some investors nervous, there is still room for AI trading. He said it has room to execute and should expand beyond the biggest winners like Nvidia. “In addition to NVDA, investors are focused on the expansion of AI trading. We expect there will likely be three broad stages of AI trading,” Hammond wrote. As AI use cases gain traction, new winners will emerge. Goldman predicts a second phase that will focus on companies building and maintaining AI-centric infrastructure. Hammond said industries involved in the next step could include chip makers, cloud providers, other technology companies and power companies. This is followed by phase 3 where companies adopt these new AI tools to increase their revenue, and finally in phase 4, companies realize that their revenue will increase due to the productivity gains brought about by AI. start. There are signs that the market is already anticipating these next steps. While Nvidia continues to rise through the first few months of his 2024 year, Hammond said he sees signs of vitality in some of these more forward-looking AI efforts as well. “Based on track record and valuations, investors have already started pricing subsequent phases of AI deals. The equal-weighted basket of Phase 2 stocks is up 14% in the past six months, driven primarily by valuation expansion. …Phase 3 “Stock prices are up 21% primarily due to valuation expansion. Valuation expansion for Phase 4 stocks is limited,” the note said. Goldman included a list of these “Phase 2” stocks in the memo. Some names are familiar to investors, such as giant technology companies like Amazon and large semiconductor stocks like Broadcom. Both have easily outperformed the S&P 500 over the past year, but not as much as Nvidia. GlobalFoundries is another semiconductor powerhouse, but its stock has fallen nearly 20% this year. Goldman says these types of semiconductor stocks may be better value for investors right now. “Phase 2 will involve casting and [integrated device manufacturers] “The company has a relatively attractive setup for strong EPS growth at a modest valuation,” Hammond wrote. Other companies, such as Teradyne and Keysight Technologies, are working behind the scenes to develop the hardware needed for AI. Both of these brands exist. “With a stall in 2024, Goldman’s second phase could be a timely bet if it materializes. And of course, the data needed for AI needs to be stored and protected. Potential beneficiaries include cybersecurity companies like Palo Alto Networks and companies like NextEra Energy that can help power data centers. These two names have also languished since the beginning of the year, despite being popular on Wall Street as utilities and other companies. According to LSEG, about 70% of analysts covering the company have given it a “buy” or “strong buy” rating. Possible companies include software companies such as Intuit and Adobe. The company’s stock is already trading with a strong correlation to Nvidia. So “Phase 3” is happening. And for those who want to be even more patient, the memo notes that AI-driven productivity gains could drive profit growth in the “fourth stage.” These stocks include Pinterest, Tenet Healthcare, and analytics firm Clarivate. —CNBC’s Michael Bloom contributed reporting.
