Goldman Sachs says that as the AI sector continues to change, so-called “platform” stocks like Microsoft and Snowflake are the most appealing part of it right now.
In a recent note, Goldman analysts led by Ryan Hammond went over their “four phases of AI” investment theory again and looked at which stocks would be the best bet for the next few months.
In conclusion, Goldman sees Nvidia NVDA 2.70% as the “clearest near-term AI beneficiary” for Phase 1.
Goldman gave Phase 2 the acronym GSCBAIP2 to help people remember it. It includes companies that work with AI infrastructure, such as chip companies, cloud providers, data center REITs, hardware and equipment companies, security software stocks, and utilities companies.
Companies in Phase 3 may be able to make money from AI, mostly through software and IT services (GSCBAIP3). Phase 4 includes the companies that could make the most money thanks to the economic gains AI is expected to bring (GSTHLTAI).
Goldman said that the AI trade as a whole has been unstable over the past six months. However, investors are still very confident in AI capital investment and related infrastructure spending, which has driven the “typical Phase 2 infrastructure stock up 27% year-to-date.”
That being said, the Phase 2 trade will now be fully developed, and share prices will rise due to rising earnings rather than rising valuations. This is because prices have gone up above average and there aren’t as many big surprises coming from Nvidia, hyperscaler capex spending, and business AI chatter.
The chart below shows that Phase 4 is still having a hard time because investors are still not sure that AI will make them more productive.
But the picture also shows that Phase 3 stocks have gone down and have been staying the same for a while now. Goldman said that their prices are lower than average, but they also said that “the timing of AI applications build-out and monetization remains too uncertain to fully rotate into these stocks in the near term.”
Goldman, on the other hand, thought that the “platform” stocks—which include databases and development tools—were the most appealing part of the Phase 3 cohort because they would be the main winners of the next round of investments in generative AI.
“Many platform stocks have dropped sharply this year due to fundamental weakness in the near future.” But compared to the past, valuations are low, and changes have mostly stayed the same in the last few months, Goldman said.
Goldman Sachs’ equity experts pointed out the stocks that make the best use of AI infrastructure and offer the building blocks for creating next-generation apps: Datadog Inc. (DDOG) fell 0.40%, MongoDB Inc. (MDB) fell 1.28%, Elastic N.V. (ESTC) fell 0.33%, and Snowflake Inc. (SNOW) fell 0.62%.
Goldman has a buy rating on all except Elastic, which is rated neutral. Microsoft, although it also qualifies for the Phase 3 basket, is not there because it was already in Phase 2.
