Goldman Sachs analysts have solved a challenging task! After much deliberation, they identified the barometer to assess would-be returns of investments in AI-related stocks. This barometer is sales forecasts. Goldman Sachs experts had doubts about the potential for sustainable profits despite significant advancements in the AI industry, particularly in the development of groundbreaking technologies.
Goldman Sachs’ report outlines four stages of AI investment. The second stage is especially worthy of attention because it is devoted to companies providing the technological conditions for AI, such as semiconductor companies and cloud service providers. This sector recorded the strongest performance of stocks.
According to bank experts, stocks “related to the technological foundation of AI at stage 2 yielded average annual returns of 26%. The robust performance of these companies was driven by substantial investments in innovative technologies.
However, Goldman Sachs notes that AI investments are “under intense scrutiny, and investors are becoming increasingly cautious about the financial returns from AI-related spending of large internet companies.” Despite large investments, the expected sales growth has been downgraded.
In this situation, analysts must revise sales forecasts for companies in the later stages of AI implementation. Companies that have reached the third stage, planning to generate revenue from AI through software and IT services, reveal mixed results.
Experts reckon that returns of AI investments depend on the balance between sales growth and profitability. Goldman Sachs recommends refraining from lavish investments without adequate sales growth.
The season of Q2 2024 corporate earnings reports could be a turning point for many companies. “Earnings reports will demonstrate whether investors are right to price in their optimism in current stock prices,” Goldman Sachs explains. AI companies will need to prove that their spending will actually boost sales and enable profit growth. The lack of evidence could trigger a decline in their stock prices.
“Investors need to closely monitor sales forecasts and analyze financial results to assess the long-term growth potential driven by AI,” Goldman Sachs adds.
Besides, the bank considers the current cycle of AI technology investments “quite modest” compared to the period of active investments in the tech sector. At the peak of that period, firms in the technology, media, and telecommunications sectors heavily invested in innovative technologies. Those investments exceed the entire cash flow from their operating activities. Currently, leading companies in these sectors, despite large-scale investment, keep their expenses below 72% of operating cash flow. Moreover, a widespread economic malaise could dent the profitability of major internet companies.
