Goldman Sachs on why AI is not a bubble and the best ways to play it

Published Tue, Sep 5 202310:25 AM EDTUpdated Tue, Sep 5 20231:08 PM EDT

The growing popularity of stocks tied to artificial intelligence has fueled fears of a bubble, but Goldman Sachs believes the rally has been justified and has more room to run. The promised benefits and profits springing from AI triggered a powerful rally this year, especially in key players such as Nvidia , Alphabet and Microsoft. The fast advance, while some view as unsustainable, has been supported by strong underlying fundamentals, Goldman said. "Current valuations in the technology sector are not as stretched as in previous bubble periods and the 'early winners' that have enjoyed the strongest returns have unusually strong balance sheets and returns on investment," Goldman strategists led by Peter Oppenheimer said in a note. "We believe we are still in the relatively early stages of a new technology cycle that is likely to lead to further outperformance," they added. The Wall Street bank previously estimated advances in AI could add $7 trillion to annual global gross domestic product over 10 years due to surging labor productivity. Goldman highlighted a list of 11 stocks in various industries as "potential near-term beneficiaries of the AI revolution." Semiconductors: Nvidia, Marvell Technology and Credo Technology Group Cloud computing infrastructures: Microsoft, Alphabet and Amazon Empowered users: Meta Platforms, Salesforce, Adobe, ServiceNow and Intuit The market value of AI enabler Nvidia has topped $1 trillion as investors piled into the stock after its own repeated strong forecasts of future demand. Marvell Technology and Credo also manufacture related equipment needed to build AI technology, Goldman said. Goldman also identified a handful of companies that use their extensive cloud computing infrastructures to commercialize AI on a large scale. Microsoft has been a red-hot AI bet as the company recently expanded a multiyear, multibillion-dollar investment in ChatGPT maker OpenAI, marking the third phase of their partnership. Alphabet's Google unit recently announced it will bring AI features to its internet search engine to turn complex queries into simple answers by combining results from multiple sources. Thirdly, companies that are currently leveraging AI technology to amplify their businesses could also be near-term winners, Goldman said. Meta is one of the companies highlighted by Goldman. The Facebook and Instagram parent has touted AI computer chips, which will eventually power more advanced metaverse-related tasks, including virtual reality and augmented reality, as well as generative AI. These enabled users also included Salesforce, Adobe , ServiceNow and Intuit .