Artificial Intelligence (AI) and related technologies have caused significant “fear of missing out” (FOMO) investor buying frenzies. Just a year ago, any company with “AI” in its name received attention and probably a surge in its stock price. However, according to a new report by Goldman Sachs, investors are becoming more focused and selective.
This has caused AI-related stocks to begin undergoing a significant shift. The era of blind enthusiasm, often characterized by FOMO investing, is giving way to a more measured approach focused on the fundamentals.
FOMO on “The Next Big Thing”
In November of 2022, OpenAI, a research company that develops machine-learning tools, unveiled ChatGPT to the public. ChatGPT, the large language model chatbot, surprised the world with how far machine learning has advanced. The hands-on experience caused a better understanding of AI’s potential to be much bigger than all previous “big” things.
During the year and a half since the OpenAI eye opener, tech investors caused an AI stock boom and a surge in valuations. This boom benefitted even those companies that were incidentally related. Simply put, if it was AI-related, its stock gained interest regardless of its actual involvement or expertise in the field.
This FOMO-driven market frenzy spiked valuations for companies that were substantially speculative and difficult to justify based on fundamentals.
Investors Shift Towards Fundamentals
Goldman Sachs (NYSE:GS), in its report titled “AI Infrastructure Stocks are Poised to be the Next Phase of Investment,” acknowledges this initial excitement but argues that the market is now entering a new phase. Investors are becoming increasingly discerning, focusing on companies with strong underlying fundamentals and a clear path to profitability in the AI space.
This shift is driven by several factors. One is the realization that AI is a broad field, encompassing a wide range of technologies with varying degrees of maturity and commercial potential. Investors are now seeking out companies that are not just developing AI but are also demonstrably applying it to solve real-world problems and generate revenue.
The Infrastructure Advantage
Goldman Sachs identifies a specific area within AI that presents a compelling investment opportunity: companies that provide the essential infrastructure for AI development. These companies offer the hardware, software, and cloud computing resources that power the development and deployment of AI applications.
As AI continues to evolve and permeate various industries, the demand for this infrastructure is expected to grow exponentially.
Investing in the Profitable Future of AI
The AI revolution is still in its early stages, but its potential to transform industries is no longer a subject of debate. For investors, the key to success lies in moving beyond the hype and focusing on companies with a clear path to profitability. The Goldman Sachs report highlights the importance of considering factors such as:
- Strong leadership teams with expertise in AI development and deployment.
- A proven track record of innovation and successful product development.
- A clear business model that leverages AI to solve real-world problems and generate revenue.
By focusing on these fundamentals, investors can position themselves to capitalize on the next phase of the AI boom, one driven by innovation and tangible business value.
Using the TipRanks Comparison Tool to view the average analyst price targets and overall Analyst Consensus, we uncover that C3ai (NASDAQ:AI), the company that developed ChatGPT, has an average analyst price target of 47.44%, but a Hold rating when aggregating analyst opinions.
Other companies in the sector, including Synopsis (NASDAQ:SNPS) have a Strong Buy rating with a 25.21% upside, Salesforce (NYSE:CRM) has a Moderate Buy rating with a 25.12% upside, ServiceNow (NYSE:NOW) has a Strong Buy rating with a 20.41% upside, and Datadog (NASDAQ:DDOG) has a Moderate Buy rating with a 22.03% upside.
Key Takeaway
The AI investment landscape is undergoing a significant transformation. The era of blind FOMO is fading, replaced by a focus on identifying companies with the potential to be long-term winners in the AI revolution. Investors who can navigate this new landscape by focusing on fundamentals and infrastructure are well-positioned to reap the rewards of this transformative technology.
