- AI enthusiasm has rebounded in recent weeks after investors worried about returns over the summer.
- In the next wave of investment, Goldman Sachs analysts recommend "platform" stocks like Microsoft and Datadog.
- Analysts recommend stocks that will build a direct application of AI and allow for more widespread adoption.
Move over, Nvidia.
With artificial intelligence investment rebounding after excitement cooled over the summer, a new set of stocks is set to benefit from the next wave of cash flowing to the burgeoning sector, according to Goldman Sachs.
In the next round of AI investment, Goldman Sachs analysts say investors should look past the obvious picks—Nvidia and AI infrastructure companies—and toward a select set of platforms set to build out a direct application of AI.
"Our equity analysts believe 'platform' stocks, including databases and development tools, are set to be the primary beneficiaries of the next wave of generative AI investments. These platforms allow the best use of AI infrastructure while providing building blocks to construct next generation applications," the analysts said in a Thursday note.
The analysts name Microsoft, DataDog, MongoDB, Elastic, and Snowflake as the best-positioned platform stocks as they roll out AI-integrated applications.
While many of those platform stocks have plunged this year on near-term fundamental weakness, they have historically low valuations and stabilizing revisions that set them up well as AI investment rebounds, the analysts say.
The analysts' recommendations come as investors remain focused on Nvidia and the companies that build out AI infrastructure, such as semiconductors, cloud providers, and data center REITs.
The analysts say the share prices for those stocks will likely continue to increase, but returns will be driven more by earnings than valuations.
"Expected future returns could be constrained by elevated starting valuations, although valuations are historically a poor near-term signal for large-cap equities," the analysts said, adding that with AI spend surprising less to the upside than before, that could make for more moderate returns for those "phase 2" AI infrastructure stocks.
In general, the platform stocks are the exception among other "phase 3" stocks—those with potential to monetize AI by generating incremental revenues like in software and IT services— because the timing of AI monetization is still uncertain.
The same goes for "phase 4" stocks, or companies that would benefit from widespread adoption in general since that's likely still years away, the analysts said.
"We believe the roll-out of applications among Phase 3 stocks is a necessary condition before investors will gain confidence about owning Phase 4 stocks with the largest potential earnings gains from AI-related productivity," they said.
The analysts' comments come after flows into AI stocks dwindled over the summer as traders expressed worries over returns on big AI spending. That led to sharp underperformance in July, and in early August, Nvidia tumbled as much as 27% from its all-time high in June.
Now, the stock is back up to trading near its record high as the AI trade has reaccelerated in recent weeks amid interest rate cuts from the Federal Reserve and strong macro data.