- Amazon, Meta, Microsoft and Alphabet have spent hundreds of billions of dollars on AI in the past four quarters.
- Goldman Sachs says the continued dominance of AI stocks could eventually be challenged.
- The focus is on whether companies can actually translate that spending into revenue and profits.
Artificial intelligence stocks are soaring, with the likes of Nvidia and Microsoft driving the market to new records, but Goldman Sachs says the companies need to finally deliver after spending big if they want to sustain their high prices.
The firm notes that Amazon, Meta, Microsoft and Alphabet have pumped a combined $357 billion into capital expenditures and research and development over the past four quarters, and of that nine-figure amount, Goldman says a “significant portion” has been allocated to AI.
With that in mind, the report’s authors, led by Ryan Hammond, are closely watching earnings downward revisions for signs that AI investments aren’t paying off. If results don’t materialize, they expect share prices for the market’s biggest companies to fall in the coming days.
“Today’s hyperscalers ultimately need to prove that their investments will generate revenue and profits,” the analysts wrote. “Early indications that revenue and profits, as measured by downward revisions to sales, may not be generated could lead to valuation downgrades.”
Goldman said concerns are beginning to filter into conversations with market participants.
“While investors have expressed uncertainty about the return on investment in large tech stocks, these stocks remain highly popular,” the analysts wrote.
They continued: “Even among investors who are long-term bullish on the potential benefits of AI adoption, there appears to be considerable uncertainty about the timeline.”
Goldman also noted that, according to metrics it tracks, only 5% of companies currently use AI to produce goods and services.
Still, the gap between capital investment and actual sales and profits is not as pronounced as it was in the past when it was considered excessive.
“Taking into account the profits of these companies, the AI capital spending cycle still pales in comparison to the tech bubble,” the analysts wrote.
