Is the Third Wave of AI Coming? Goldman Sachs Names Stocks Set to Benefit

Goldman Sachs' "Four-Stage AI Investment Framework" outlines a comprehensive path for AI development, from hardware-driven growth to a productivity revolution. We are in the second stage - AI infrastructure development - a critical phase that determines the ecosystem's sustainability.

Challenges extend beyond valuations. Growth in cloud giants' capital expenditure is slowing, and NVIDIA's demand for chips is stabilizing, suggesting that infrastructure development may be reaching maturity. Although NVIDIA continues to benefit from robust GPU demand, analysts caution that the growth of cloud investment may not sustain its current pace. Meanwhile, enthusiasm for generative AI appears to be cooling. For instance, companies' mentions of AI in earnings reports have leveled off, signaling a more cautious and rational market sentiment.

The outcome of the second stage is crucial not only for the performance of infrastructure stocks but also for the AI ecosystem's transition to the third stage: application monetization. Current data reveals that AI applications are still in their infancy, with monetization pathways unclear. Goldman Sachs notes that generative AI accounts for only 3% of IT budgets 2024, indicating widespread commercialization is still a way off. Nevertheless, "platform" companies, such as those providing databases and development tools, are emerging as critical players in supporting the broader AI ecosystem.

Earlier this year, Goldman Sachs introduced its "four stages of AI investment." Software stocks like databases and developer tools stand out as potential winners in the third stage.

Transitioning from the second to the third stage will be pivotal, particularly as only 6% of enterprises currently use generative AI in production, a figure well below market expectations. Goldman Sachs advises focusing on "platform" stocks that enable generative AI development, such as database and developer tool providers.

Analysts believe that strong performance from companies like AppLovin shows AI applications are entering a phase where they can start generating revenue. Cinda Securities emphasizes that AI remains a top investment theme, with a focus on AI-driven applications.

Goldman Sachs noted that 84% of third-phase AI stocks exceeded expectations in their Q3 results, compared to only 53% in the second phase. Many of these companies are now launching AI products and turning them into revenue.

As for the fourth stage, the AI-driven productivity revolution, Goldman Sachs believes its investment potential will take time to materialize. The success of this stage hinges on the adoption of generative AI and the successful rollout of applications in the third stage. Only a small fraction of enterprises are actively leveraging generative AI in production, highlighting the distance to full-scale adoption.

In conclusion, the second stage of AI investment represents both opportunity and risk. In the short term, investors should monitor whether infrastructure companies can justify their high valuations through tangible profit growth. Over the medium to long term, demand for AI infrastructure remains resilient, but investors must remain vigilant against potential market fluctuation.