So-called “platform” stocks, such as Microsoft and Snowflake, are currently the most attractive part of the AI sector as the sector continues to evolve, according to Goldman Sachs.
In a recent note, a team of Goldman analysts led by Ryan Hammond revisited its “four phases of AI” investment hypothesis and examined which stocks would offer the best bet in coming months.
To recap, Goldman considers Nvidia NVDA2.43%, as the “clearest near-term AI beneficiary,” to encapsulate Phase 1.
Phase 2 comprises firms focused on AI infrastructure, including semiconductor firms, cloud providers, data center REITs, hardware and equipment companies, security software stocks and utilities companies, according to Goldman, which gave this cohort the mnemonic GSCBAIP2.
Phase 3 includes companies with the potential to monetize AI — primarily via software and IT services (GSCBAIP3). Phase 4 includes companies with the biggest potential earnings boost because of the productivity gains it is hoped AI can provide (GSTHLTAI).
Goldman noted that the overall AI trade has been volatile over the past six months, though investors continue to have the highest conviction in AI capital expenditure and associated infrastructure spending, pushing the “typical Phase 2 infrastructure stock up 27% year-to-date.”
However, this means the Phase 2 trade will mature, with earnings growth rather than valuation expansion, pushing share prices higher. That’s because valuations are now above average and the magnitude of positive surprises from Nvidia, hyperscaler capex spending, and corporate AI chatter have all dwindled.
As the chart below shows, Phase 4 continues to struggle as investors remain unconvinced about the productivity benefits of AI.
But the chart also shows that Phase 3 stocks have fallen back — and in recent months, have gone sideways. Even though Goldman said their valuations are below average, they added that “the timing of AI applications build-out and monetization remains too uncertain to fully rotate into these stocks in the near term.”
However, Goldman reckoned that the “platform” stocks, which include databases and development tools, represent an attractive subset of the Phase 3 cohort because they will be primary beneficiaries of the next wave of generative AI investments.
“Many of the platform stocks have plunged year-to-date on near-term fundamental weakness. However, valuations are low vs. history and revisions have generally stabilized in recent months,” Goldman said.
Goldman’s equity analysts highlighted the stocks that allow the best use of AI infrastructure while providing building blocks to construct next-generation applications: Microsoft Corp. MSFT0.68%, Datadog Inc.DDOG-0.53%, MongoDB Inc.MDB-1.27%, Elastic N.V. ESTC 0.14% and Snowflake Inc. SNOW-0.70%
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.