Everyone and his dog is now familiar with Nvidia. We have taken profits on it, and we continue to hold a long-term position in the TM-IM portfolio. It remains a clear winner of the AI boom. I recently came across this AI report from Goldman Sachs.
Here is a section:
So far, investor optimism isn’t running as high as it was at prior peaks in 2000 and 2021, Goldman Sachs Research strategist Ryan Hammond writes in the team’s report. The implied level of long-term earnings growth that investors expect has climbed to 11% a year.
That’s above the long-run average of 9% but still below the 16% percent growth that was expected at the height of the technology bubble in 2000 or the 13% growth implied by stock prices at the peak of the post-Covid rally in 2021.
The analysis is based on the relationship between return-on-equity and price-to-book, to quantify the long-term growth in earnings implied by how the market is priced today. As another way to measure optimism, analyst growth estimates are optimistic for the 10 largest technology companies but, again, are below what was seen during the technology bubble.
The median large tech company is expected to deliver 15% earnings per share growth in three years, according to analysts’ consensus estimates. That compares with a median of 11% for the S&P 500 as a whole, but it’s well below the 24% earnings growth analysts foresaw in March 2000.
What’s more, current valuations of large tech stocks are not as stretched as they were in prior periods. The 10 largest are trading at 28 times earnings, which “pales in comparison to the peak of the tech bubble,” Hammond writes. Valuations for the 10 biggest tech companies reached 52 times earnings in 2000 and touched 43 times in late 2021.
Nvidia shares have returned more than 500% since the start of 2023. Remarkably, though, those gains have been entirely driven by earnings growth. The company’s price-to-earnings ratio is barely higher than it was at the start of last year, according to Goldman Sachs Research.
While Nvidia has dominated the initial phase of the AI trade, the companies in Goldman Sachs Research’s three subsequent phases have also outperformed relative to their industry groups over the past six months.
Companies beyond Nvidia that stand to benefit from the buildout of AI-related infrastructure include semiconductor designers and manufacturers, cloud providers, computer and network equipment makers, data center real estate investment trusts, utilities, and security software providers.
To date, the performance of stocks in this group has varied widely, Hammond writes. Companies that design chips and have intellectual property in this area, along with security companies, have had significant gains. On the other hand, utilities that might be expected to benefit from increased electricity demand from data centers have barely budged.