Investing.com — Goldman Sachs analysts told investors in a recent note to seize the opportunity in AI stocks following a recent dip, stating that AI-related companies remain fundamentally strong.
“Buy the dip in AI,” the investment bank titled its note. They explained that their AI data centers basket (GSTMTDAT) and AI PC & mobile device upgrades basket (GSXUPCAI) have “reverted back to the benchmark,” while the Broad AI basket (GSTMTAIP) is down 12% from its year-to-date highs.
Despite this drop, these stocks “beat earnings by an average of 8%,” which is around 3 percentage points higher than the S&P 500, and are now trading at a discount to forward earnings expectations.
Goldman Sachs highlighted several key factors likely to support a recovery in AI stocks.
They anticipate lower interest rates boosting IT projects, while the conclusion of the upcoming election is expected to reduce economic policy uncertainty.
Moreover, the bank anticipates tangible progress in AI products at upcoming industry conferences.
Referring to recent developments, they cited a notable comment from NVIDIA’s CEO at a Goldman tech conference, who emphasized the significant return on investment for hyperscale customers, noting that for every $1 spent on NVIDIA (NASDAQ:NVDA) infrastructure, $5 in rental revenue is generated.
Furthermore, the bank says valuations in the AI space have now normalized.
According to Goldman Sachs, their AI data center and broad AI baskets are only slightly above the S&P 500 in terms of valuations, following a period of elevated premiums in the spring.
They believe “AI expressions are cheap to YTD earnings trends,” and further declines would likely require “fresh bad news,” which they view as unlikely.
Goldman also highlights the growing role of data centers in driving U.S. power demand, projecting that they will account for approximately 90 basis points of a 2.4% U.S. power demand CAGR through 2030.
