It is undeniable that the technology sector is acutely focused on artificial intelligence in 2024. For that matter, most companies that are not even in technology are trying to see what AI can do for their businesses. And A.I. has created literally trillions of dollars in marketplace values for the companies who are leading the change. What if all the AI hope of 2024 is simply not a financial reality for an expected pay-off?
Goldman Sachs has issued a view that is a skeptical look at AI investment as companies are set to throw an estimated $1 trillion on AI capital spending investment in the coming years. This may not be a popular take, but some functions simply will not either be cost effective or will not be worth the effort.
The Goldman Sachs note sourced Daron Acemoglu, Institute Professor at MIT, who currently estimates “only a quarter of AI-exposed tasks will be cost-effective to automate within the next 10 years.” The translation is that AI will impact less than 5% of all tasks. And for the big productivity and income boost from AI, Acemoglu currently expects that AI can boost US productivity by only 0.5% and GDP growth will only be 0.9% cumulatively over the next decade. Acemoglu also warns that truly transformative changes won’t happen quickly — with few, if any, likely occur within the next 10 years.
Goldman Sachs Exchanges had the Top of Mind report where Acemoglu said:
“The current architecture of the large language models has proven to be more impressive than many people would have predicted, but I think it still takes a big leap of faith to say that just on this architecture of predicting next word, we’re going to get something that’s as smart as, you know, Hal in 2001: A Space Odyssey. So anything that’s invented — or big breakthroughs — is not going to have a huge effect within the next few years.”
Goldman Sachs’ Head of Global Equity Research Jim Covello also weighed in. His view is, for companies to earn an adequate return on the massive $1 trillion projected cost of developing and running all this AI technology, that AI must be able to solve complex problems that it’s not built to do. Covello’s take:
“We’re a couple of years into this, and there’s not a single thing that this is being used for that’s cost-effective at this point. I think there’s an unbelievable misunderstanding of what the technology can do today. The problems that it can solve aren’t big problems. There is no cognitive reasoning in this.”
Covello has been reported independently as a skeptic that AI is going to meaningfully change the world. Before you dump any and all of your AI-related stocks (and semiconductor stocks), keep in mind that the firm has mixed views on various AI-leading stocks and semiconductor stocks. And Covello’s title doesn’t mean Goldman Sachs has issued scathing “Sell” ratings either.
NVIDIA Corporation (NASDAQ: NVDA) is rated as Buy and Goldman Sachs raised its target to $135 from $120 as recently as June 11 — and before the split it has raised that prior $120 target from $110 in late-May after a similar $10 equivalent price target hike early in May. And at least two other price target hikes were issued by Goldman Sachs on NVIDIA earlier in 2024. And more recently, after meeting with NVIDIA’s CFO, Goldman Sachs’ Toshiya Hari reaffirmed NVIDIA’s strong market position and future prospects.
Super Micro (NASDAQ: SMCI) is still rated only as Neutral and in May Goldman Sachs cut its price target down to $800 from $937. The firm only initiated coverage of “SMCI” as Neutral back in March. The firm’s Michael Ng said it was fairly valued after such a sharp rally even then.
Dell Inc. (NASDAQ: DELL) was given a note in April from Goldman’s Ng as well where he noted that an increase in backlog of $2 billion during the April quarter would have given Dell visibility into $5 billion of AI server revenue for the current fiscal year. And NG sees Dell’s AI server revenues reaching as much as $6.8 billion this year.
As far as semiconductors, Goldman Sachs has more recently looked more bearish on the semiconductor space on the heels of potentially stronger export restrictions to China. The firm sees semiconductors as an extremely crowded trade after monumental gains. The firm also sees geopolitical risks and upcoming earnings potentially offering an attractive opportunity for investors to hedge some drawdown risks.
Is International Business Machines Corp. (NYSE: IBM) a big AI stock lurking behind? Goldman Sachs analyst James Schneider noted as recently as June that shares of IBM can continue to see higher valuations (rerating) as its software business mix improves and as consistent financial performance is seen. His rating on IBM is “Buy” and he has a $200 price target.
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Tactical Bulls has seen many A.I.-related price target hikes from elsewhere on Wall Street ahead of earnings from the likes of NVIDIA and other key semiconductor stocks tied to AI and advanced technologies. Tactical Bulls would also issue the reminder that no single research report (or research point) should ever be the sole basis for investors to buy or sell an investment. That decision to buy or sell an investment is up to each investor and their financial advisors.