The early winners in artificial intelligence have strong fundamentals and less extreme valuations compared with stocks seen in previous periods of exuberance, according to Goldman Sachs strategists, rebutting concern that a bubble is building in AI.
"We believe we are still in the relatively early stages of a new technology cycle that is likely to lead to further outperformance," Goldman strategists led by Peter Oppenheimer wrote in a note titled Why AI Is Not a Bubble. Stocks leading the AI rally trade at significantly lower levels than the biggest firms during past tech bubbles, Oppenheimer said, and today's companies are already profitable and generate cash.
The release of OpenAI's ChatGPT tool last year fueled demand for generative AI, driven by the technology's potential to disrupt industries from banking to education to film. Citigroup strategists have predicted broad impacts from AI will be seen across businesses in as little as two years, characterizing the technology as the stock market's "new growth thing."
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The excitement has spurred a rush to identify early winners. Chipmaker Nvidia has served as the poster child for the group, with its shares up 232% this year. Goldman's U.S.-based analysts have come up with a basket of companies with the greatest potential long-term boost to earnings per share from AI,
The Nasdaq 100 Index has gained 42% in 2023, compared with an 18% rise for the broader S&P 500 Index. The fact that technology stocks have outperformed despite rising bond yields shows that investors are assuming that higher growth rates in the future will offset higher discount rates, Goldman's strategists said.
Goldman's optimism flies in the face of a more cautious approach taken by fellow investment banks. Bank of America strategists have warned that AI won't save technology stocks from the impact of higher-for-longer interest rates, while Morgan Stanley has said that the bubble is nearing a peak.
One challenge is how to value the scale of the benefits from AI, as well as picking out the winners and losers, Goldman said.
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"Given the valuations of the dominant incumbent companies are high but not excessive, we believe we are still generally in the first phase of a typical technology wave," the strategists wrote. "If this is the case, it suggests there will be further emergence of new entrants in the space and still higher valuations in this part of the market."
Goldman's Oppenheimer correctly called last year's stock slump, though his late June view that the 2023 stock rally would be capped by higher rates and valuations hasn't yet materialized.
--With assistance from Thyagaraju Adinarayan, Subrat Patnaik and Farah Elbahrawy.
