AI Is for Real but Investments May Be Frothy

Will artificial intelligence prove to be the next big thing or is investors’ enthusiasm for it overdone? Goldman Sachs interviewed several experts to get their views.

Don’t Miss: How to Invest in Artificial-Intelligence Technology

Sarah Guo, Founder of Conviction VC

Founder of Conviction, an AI-focused venture-capital firm and formerly a general partner at VC stalwart Greylock.

“Misjudging the timetable of large technology shifts is a common pitfall in investing. I am all-in on a fundamental bet that this shift will drive substantial value creation, but this is a decade-plus transition. In the meantime, areas of mispricing have certainly surfaced,” she said.

As for investing in AI, “distinguishing between AI marketing and AI reality will be hard work for investors,” Guo said.

“This is a highly technical field, and the state of the art changes every week. The rapid leadership commitment from public companies to the AI trend has been extraordinary. 

“But painting your earnings calls and company statements with AI marketing isn’t going to do much good if it doesn’t translate into margin improvement, better products, and new revenue.”

Prof. Gary Marcus: ‘Be Wary of the [AI] Hype’

Professor emeritus of psychology and neural science at New York University

“Generative AI tools are no doubt materially impacting our lives right now, both positively and negatively. They’re generating some quality content, but also misinformation,” he said.

His advice to investors: “Be wary of the hype. AI is not yet as magical as many people think. 

“I wouldn’t go so far as to say that it’s too early to invest in AI. Some investments in companies with smart founding teams that have a good understanding of product market fit will likely succeed. But there will be a lot of losers. So investors need to do their homework and perform careful due diligence on any potential investment.”

Peter Callahan, TMT Analyst at Goldman Sachs

U.S. technology, media, and telecommunications sector specialist at Goldman Sachs Global Banking & Markets.

“AI is no doubt the dominant theme in the public marketplace, with AI mania in full flight right now. I don’t remember a theme being this pervasive and important to investors,” he said.

“Unlike other recent product-cycle stories that ultimately lost steam, including blockchain and the metaverse, which appealed largely to a relatively narrow, specialist investor base, AI is attracting interest from investors of all shapes and sizes.

“That broad interest has translated into price action, with a small group of large tech stocks massively outperforming the broader market year-to-date and a handful of smaller cap stocks rising to the tune of 200%.”

Has it gone too far? “Whether too much has been priced in is always easier to answer in hindsight,” Callahan said.

Kash Rangan, Goldman Sachs Software Analyst

Goldman Sachs equity analyst for U.S. software.

“AI probably isn’t in a hype cycle. This technology cycle isn’t being led by upstarts, which makes it less likely to fizzle out or take a long time to get going.”

Eric Sheridan, Goldman Sachs Internet Analyst

Goldman Sachs equity analyst for the internet.

“While you never know you’re in a bubble until it pops, the vast majority of the companies that have outperformed the broader market over the last several months on the AI theme are still trading at relatively reasonable multiples to earnings.”

Action Alerts PLUS offers expert portfolio guidance to help you make informed investing decisions. Sign up now.