The rapidly growing US technology stocks have raised concerns among Wall Street analysts. More and more people are questioning whether too much investment has been put into the AI industry with little return.
Goldman Sachs strategist Ryan Hammond's team stated in a recent report that internet giants such as Amazon, Meta, Microsoft, and Google have spent approximately $357 billion on capital expenditures and research and development in the past year, with a 'significant proportion' of these expenditures being used for artificial intelligence, accounting for nearly a quarter of the S&P 500 index's total capital expenditures and research and development expenditures.
Goldman Sachs warns:
Today's large-scale enterprises will ultimately be required to prove that their investments can generate revenue and profits. If there are no signs of profitability, it could lead to devaluation.
This is not the first time that Goldman Sachs has been bearish on AI. Previously, the bank issued a heavyweight TOP OF MIND report, in which some of the experts and analysts interviewed by Goldman Sachs believed that the technology industry may have invested too much in AI and received too little in return.
Jim Covello, Goldman Sachs' head of stock research, pointed out in the TOP OF MIND report that the current AI bubble may be more serious than the internet bubble of the late 1990s. He wrote,
The cost of developing and running AI technology is very high, estimated to be about $1 trillion. To make this investment worthwhile, AI needs to solve very complex problems, but it can't do that yet. Disruptive technologies like the internet could be replaced with low-cost solutions even in the early stages. AI is currently expensive and cannot provide cheaper alternatives.
Media compilations show that Amazon's capital expenditures are expected to increase from $53 billion in 2023 to $63 billion this year. Meta and Google parent Alphabet will spend record amounts in 2024.
The buzz around AI has driven the U.S. stock market to record highs this year, with Nvidia being one of the biggest beneficiaries of the trend. Investors generally expect this frenzy to remain a key feature of the market rebound in the second half of the year, although some are betting that industries such as infrastructure providers and utilities will lead the way in the remaining time in 2024.
However, Goldman Sachs also acknowledges that compared to the levels of capital spending during the dot-com bubble burst period of the millennium's Network Technology stocks, current AI spending is 'still dwarfed.'
According to Ryan Hammond's team's calculations, during the dot-com bubble burst period, technology, media, and telecommunications companies used over 100% of their operating cash flows for capital expenditures and research and development. Today, this number is 72%.
In other words, even if the AI industry is a bubble, it is still far from bursting now.