Nvidia has been a trailblazer in the realm of artificial intelligence-related stocks, sparking concerns about overvaluation and a looming tech bubble. However, analysts at Goldman Sachs are quick to dismiss these worries, citing robust earnings growth expectations that justify the company’s soaring stock prices.
Fueling the Fire
Since the beginning of 2022, Nvidia’s stock has skyrocketed by an impressive 522%, with an 84% increase year-to-date. Goldman analyst Ryan Hammond notes that the company’s price/earnings ratio has remained steady since the start of 2023, attributing the surge in stock value primarily to a surge in earnings.
Contextualizing the Frenzy
Contrary to concerns of a tech bubble, Hammond emphasizes that current three-year earnings growth expectations for the top 10 tech stocks are around 15%, notably lower than the 24% witnessed during the tech bubble of 2000. Valuations currently sit at 28x earnings, a far cry from the staggering 52x seen over 20 years ago.
Phase 2: Building the Foundation
Looking ahead, Hammond anticipates three subsequent phases of the AI trade that promise abundant investment opportunities. The second phase will emphasize companies instrumental in the infrastructure necessary for AI development, including chip designers like Broadcom Inc and Advanced Micro Devices Inc, as well as manufacturers like Intel Corporation and GlobalFoundries Inc.
Phase 3: Revenue Enrichment
Transitioning to the third phase, businesses that integrate AI into their product offerings to boost revenues will take center stage. Companies such as Adobe Inc, Meta Platforms Inc, and Apple Inc are poised to benefit significantly from this wave of AI-driven revenue enhancement.
Phase 4: Unleashing AI Productivity
As the AI trade evolves, the focus will shift to companies across various industries embracing AI technology to enhance productivity. Sectors poised for substantial earnings growth include software and services, as well as commercial and professional services, leveraging AI adoption to augment labor productivity.
Hammond predicts that investors will gravitate towards Phases 2 and 3 more swiftly than Phase 4, as firms may take time to acclimate to the productivity gains AI offers. Initial reluctance to AI adoption might stem from concerns about job displacement among staff.
Investment Avenues
For investors seeking exposure to the burgeoning tech trends, exchange-traded funds like the Global X Artificial Intelligence & Technology ETF and iShares Semiconductor ETF provide avenues for participating in the AI revolution.