Goldman Sachs on the AI boom’s next big beneficiaries (and where to bet your money)

The artificial intelligence investment landscape is evolving beyond the initial focus on semiconductor manufacturers, with investors increasingly looking toward companies that directly implement and benefit from AI technologies.

Market dynamics and shifting trends: Nvidia’s remarkable stock performance, which drove significant S&P 500 gains in 2023, shows signs of cooling as investors reassess AI investment opportunities.

• Nvidia’s stock has surged 180% in 2023, contributing approximately one-fifth of the S&P 500’s gains
• Trading volume in Nvidia has decreased 40% compared to the first half of the year
• The company’s shares have risen only 3% over the past six months, underperforming the S&P 500’s 11% gain
• Recent weeks have seen a 9% decline in Nvidia’s share price

Infrastructure and energy implications: The AI boom is creating substantial demand for power and computing infrastructure, opening new investment opportunities.

• Microsoft’s 20-year deal with Constellation Energy includes plans to reopen the Three Mile Island nuclear plant
• OpenAI’s Sam Altman has requested support for building 5-gigawatt data centers, each requiring power equivalent to five nuclear reactors
• Infrastructure investments extend to cloud providers, data-center owners, and security software companies
• Palantir, a security software provider, has quadrupled in value, outperforming most S&P 500 stocks

Investment phase transition: Goldman Sachs identifies four distinct phases of AI investment focus, with markets preparing to enter the third phase in 2025.

• Phase 1 focused on semiconductor manufacturers like Nvidia
• Phase 2 centered on AI infrastructure development
• Phase 3 will emphasize companies generating AI-enabled revenues
• Phase 4 will target industries transformed by AI implementation

Companies to watch: The next wave of AI investment opportunities lies in software and IT services companies leveraging AI capabilities.

• Notable companies include Datadog, MongoDB, and Snowflake, which specialize in cloud-based data management
• Microsoft maintains a strong position in the AI-enabled revenue category
• Companies demonstrating measurable productivity gains through AI implementation are attracting investor attention

Strategic outlook: As AI technology matures, focus shifts from speculation to tangible business improvements and measurable returns.

• Bank of America predicts a 10% S&P 500 rally in the coming year
• Investors are increasingly valuing companies that show concrete productivity and efficiency gains
• The transition emphasizes measurable improvements in revenue and cost management
• Market participants are becoming more selective, favoring companies with demonstrable AI implementation success

Future considerations: While enthusiasm for AI technology remains strong, investors are becoming more discerning about valuation metrics and seeking concrete evidence of AI’s impact on business performance rather than speculative potential.