If you think you’ve completely missed the artificial intelligence trade, think again. Analysts at Goldman Sachs released a note to clients late Monday, looking at what they called “The (AI) trade after the trade.” The research is meant to identify potential long-term beneficiaries of AI adoption, beyond this year’s hype that has sent many of these big companies’ stocks soaring year-to-date. The note starts off by discussing the three primary categories of the current AI trade: (1) enablers, those companies needed to build and run artificial intelligence; (2) hyperscalers, the cloud providers with the infrastructure to deliver AI to the masses; and (3) empowered users, those that leverage AI technology to enhance their businesses and increase user efficiency. The analysts later go into a more granular assessment of which companies and sectors could see significant earnings boosts on the backs of these leaders as AI adoption increases. Starting with Goldman’s three main AI categories, it’s no surprise to find Club name Nvidia (NVDA) on the enabler list. Marvell Technology (MRVL), a former Club stock and current Bullpen stock, is also included. Artificial intelligence research would not be possible without the hardware (and in some cases software) that these companies develop. The biggest three cloud providers — Club holdings Amazon (AMZN), Microsoft (MSFT) and Alphabet (GOOGL) — are in the hyperscaler category. They rely on the enablers to support their cloud computing environments and AI research and development. These companies are also creating large language models, generative AI tools, and more to enhance their own offerings. Some examples: Amazon’s purchase recommendations, ChatGPT from Microsoft-backed OpenAI, or Alphabet’s AI-enhanced Google search. The empowered users include companies such as Club names Meta Platforms (META) and Salesforce (CRM). They don’t run public clouds but leverage AI internally and offer tools to end users that make them better and more efficient. Meta, for example, has built AI tools that have increased engagement and helped ad buyers better target their ad campaigns. Salesforce’s Einstein GPT is a generative AI model specialized for customer relationship management. At this point, the names noted above are pretty well known to investors as they have already begun to realize the benefits of AI implementation and seen their stocks rewarded. But, in addition to surveying the AI landscape, the Goldman note aims to answer the question: What is the trade after the trade? In other words, which kinds of companies can realize earnings upside in the future by leveraging the technology that those three groups provide? To get a sense of this, the analysts considered AI implementation from two angles: (1) the impact enhanced worker productivity could have on revenue, and (2) the impact AI could have if revenue was unchanged but labor costs were reduced as a result of AI implementation and automation. The common theme here is enhanced worker productivity; AI leading to revenue growth and lower labor costs, an obvious benefit to the bottom line. This work productivity focus indicates that the companies with the most to gain are those with high labor costs as a percentage of revenue and a high percentage of labor costs associated with roles that can be altered or replaced entirely by artificial intelligence. “Firms employing a large number of knowledge workers (e.g., financial, information, and other technical fields) and in administration-heavy sectors (e.g., education and healthcare) likely have the most to gain from AI adoption,” the Goldman analysts said in their report. The universe used for this analysis was the Russell 1000 — and in their view, the “framework implies earnings for the median Russell 1000 stock could be 19% greater than the baseline via widespread AI adoption and increased labor productivity.” For the typical Russell 1000 stock, the analysts said that “33% of the wage bill is potentially exposed to AI automation and labor costs currently represent 14% of total sales.” They added, “The potential boost from higher sales would increase earnings by 11% and reduced labor costs would increase earnings by 26%, all else equal.” Using this methodology, Goldman singled out several stocks in each market group, including Club names Amazon in the Consumer Discretionary sector and Costco (COST) in Consumer Staples. We agree with the Goldman analysts that the market has yet to think much beyond the obvious AI winners of the moment. They are taking the right approach by focusing on the impact AI could have on labor dynamics. In fact, members may recall that we conducted a similar analysis on Club holding Starbucks (SBUX), on the premise that companies with a large number of employees in roles that AI is already demonstrating an ability to disrupt are the low-hanging fruit for margin expansion opportunities. In our own analysis, we concluded that replacing an average of four workers per location (three baristas and one shift manager) with AI solutions could potentially expand the company-run store operating margin by about 4.7 percentage points and increase total operating profit by about $1.26 billion, a roughly 27% increase. The Goldman analysis increases our conviction that labor costs and their ability to be reduced via the implementation of AI is how investors need to be thinking if they are going to figure out the “trade after the trade.” (Jim Cramer’s Charitable Trust is long AMZN, MSFT, GOOGL, META, CRM, COST). See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
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If you think you’ve completely missed the artificial intelligence trade, think again.
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