Goldman Sachs emphasizes monitoring sales revisions for future of AI trade

From Investing.com: 2024-07-14 05:31:02

Goldman Sachs analysts highlight the importance of sales revisions in assessing the future of the AI trade, noting skepticism surrounding long-term profitability despite significant growth in the sector. While Phase 2 companies focusing on AI infrastructure have shown strong performance, concerns arise about revenue growth and returns for later-phase AI companies monetizing through software and IT services.

Investor focus shifts to sales revisions of Phase 3 AI companies, with expectations for volatile performance based on recent declines in stocks with enabled revenues. The durability of the AI trade depends on aligning sales and earnings growth with significant investments, as history warns against overinvestment without revenue growth.

As the second-quarter earnings season approaches, companies involved in AI face a critical test to demonstrate tangible sales and earnings growth. Early signs of failure could lead to stock de-rating, emphasizing the need for sustained revenue generation. Comparisons to the Tech Bubble era highlight the risks of overinvestment without corresponding revenue growth.

Goldman Sachs emphasizes the importance of closely monitoring upcoming earnings reports and sales projections to evaluate the long-term viability of AI-driven growth. With the necessary earnings growth for hyperscalers to maintain recent ROI in line with current consensus, a broader economic slowdown could challenge their returns. The AI capex cycle, while growing, remains below levels seen during the Tech Bubble.



Read more at Investing.com: Goldman Sachs says this is ‘a key indicator for the durability of the AI trade’ By Investing.com