We recently made a list of Goldman Sachs’ Best Phase 2 AI Stocks: Top 24 High Conviction AI Stocks. In this piece, we will look at where Meta Platforms, Inc. (NASDAQ:META) ranks among the list of Goldman Sachs’ Phase 2 AI stocks.
While consumer technology stocks had soared in the aftermath of the coronavirus pandemic, back then, their share price gains were due to. the growing demand for technology products and services due to lock downs. Now, big technology stocks have persisted in their strong performance despite high interest rates since they have been judged by the market as the top innovators and performers in the artificial intelligence industry.
Since AI is somewhat of a ubiquitous technology, its impact is on several industries. So far, we’ve seen most of the stock market returns related to AI directly tied to just one stock. This stock continued to be the fifth most trending AI stocks as recently as in mid October and its share price returns are nothing short of unbelievable. From its bottom in October 2022 when the split adjusted share price was a mere $11.23, the shares have gained a stunning 1,100%. In other words, if you had invested just $100 back then in the shares and then held onto them for dear life, your investment would be worth $1,200 today.
This is the magic of AI, a technology that has caught Wall Street and retail investors alike by storm. However, AI’s impact, and its enablement, aren’t limited to the GPU designer we’ve mentioned above. While GPUs are the ‘oil’ for this technology, a wide variety of other components from data center infrastructure, networking equipment, connectivity, and energy all will have to play their part if OpenAI CEO Sam Altman’s plans of initially building as many as 7 AI data centers across the US, with each data center guzzling an unbelievable 5 Gigawatts of electricity, are to come to fruition.
This then makes us ask, what are such stocks that might enable 35 Gigawatts of AI data centers across the US? After all, in order to meet the world’s demand for AI chips, Altman believes that an unfathomable $7 trillion will need to be spent for building 36 chip manufacturing fabs and additional AI data centers. This money has to be spent somewhere, and therein lies the answer to our question. Things get clearer when we look at a detailed research report from investment bank Goldman Sachs. This report segregated the AI sector into four categories.
The first category only included Wall Street’s AI darling, the second was made of AI capacity providers like server companies, other semiconductor firms, and utilities, the third included firms that sell AI products and software, and the fourth category firms were those that will benefit from AI adoption. In its report, the investment bank shared that year to date in July, the first category had returned 139%. As of mid October, this category has gained 179% on the stock market, so safe to say returns have accelerated despite some turbulence in between. By July, the second group of firms was also doing well. Its returns ranged between ~-8% to ~50%, with the average stock having delivered 22%.
Zooming into these firms, the utility sector is one which had particularly impressed the bank. It shared that utilities were the best performing sector in the flagship S&P index between March and May courtesy of their 16% returns. Their three month returns ranked in the 98th percentile since 2022 and were the third highest after 2003 and 2020 rallies. This outperformance is unsurprising given the strong investments in data centers that have taken the US by storm this year.
These investments have led to estimates suggesting that America’s data center hub, Northern Virginia, will require 11,000 megawatts of electricity by 2035 – demand which has already spurred $5.2 billion in investments for transmission lines and coal fired power plants. Estimates from Boston Consulting Group believe that by 2030, AI will account for 16% of America’s energy consumption and touch 130 gigawatts. For a detailed look at the link between electricity use and data centers, you should read 15 Best Data Center Stocks To Buy According to Jefferies, Citi and Wall Street Analysts.
The bustling optimism surrounding AI is also reflected in revenue estimates. Goldman’s September 2024 research shows that 2025 revenue estimates of semiconductor firms, software enablers, and hardware firms except semiconductors are roughly 2.3x, 2.05x, and 1.8x over 2019 levels, respectively. Similarly, non semiconductor hardware companies have seen their revenue forecasts for Q4 2025 jump to $450 billion for a $380 billion gain over Q1 2024’s $70 billion. Makes us wonder whether it’s this group of companies that might see a stock mirror the 1,100% returns of Wall Street’s AI darling.
Our Methodology
To make our list of Goldman Sachs’ best phase 2 AI stocks, we ranked the 20 stocks with the highest year to date returns and some other big tech and data center names that have announced multi billion dollars in capital expenditure by their year to date performance.
For these stocks, we also mentioned the number of hedge fund investors. Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here).
A close up of a confident investor making a decisive transaction in the stock market.
Meta Platforms, Inc. (NASDAQ:META)
Year To Date Share Price Gain: 70.36%
Number of Hedge Fund Investors in Q2 2024: 219
Meta Platforms, Inc. (NASDAQ:META) is the final mega cap big tech company on our list with access to self developed foundational AI models. While originally being a social media company that currently has a user base of 3.2 billion people, Meta Platforms, Inc. (NASDAQ:META)’s focus on high technology has meant that it is one of the leaders in the AI industry. The firm’s Llama foundational AI model and broader AI focus have enabled it to become one of the few that are offering AI products to consumers. Meta Platforms, Inc. (NASDAQ:META)’s AI offerings include a voice AI assistant, AI based photo editing, AI translations, and AI image generation. Its Facebook platform earns through running advertisements, and like Amazon, Meta Platforms, Inc. (NASDAQ:META) is also offering a suite of AI products to businesses. These include AI customer support tools and AI advertisement tools. They give the firm one of the broadest AI portfolios in the market, making it unsurprising that the stock is up 70.36% year to date.
Meta Platforms, Inc. (NASDAQ:META)’s management shared details for Meta Studio during the Q2 2024 earnings call:
“And this week we launched AI Studio, which lets anyone create AIs to interact with across our apps.
I think the creators are especially going to find this quite valuable. There are millions of creators across our apps, and these are people who want to engage more with their communities, and their communities want to engage more with them, but there are only so many hours in the day. So now they are going to be able to use AI Studio to create AI agents that can channel them to chat with their community, answer people’s questions, create content and more. So I’m quite excited about this. But this goes beyond creators too. Anyone is going to be able to build their own AIs based on their interests or different topics that they are going to be able to engage with or share with their friends. Business AIs are the other big piece here. We’re still in Alpha testing with more and more businesses.
The feedback we’re getting is positive so far. Over time, I think that just like every business has a website, a social media presence, and an email address, in the future I think that every business is also going to have an AI agent that their customers can interact with. And our goal is to make it easy for every small business, eventually every business, to pull all of their content and catalog into an AI agent that drives sales and saves them money. When this is working at scale, I think that this is going to dramatically accelerate our business messaging revenue. There are a lot of other new opportunities here that I’m excited about too, but I’ll save those for another day when we’re ready to roll them out. The engine that powers all these new experiences is the Llama family of foundation models.”
Overall META ranks 11th on our list of Goldman Sachs’ top phase 2 AI stocks. While we acknowledge the potential of META as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than META but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published on Insider Monkey.