AI infrastructure companies took off in 2024 as investors put their money in the picks and shovels.
Goldman Sachs believes companies using AI to boost revenues will be next to take off in 2025.
Here are 11 companies that are realizing revenue gains from the technology.
This year, the AI story has dominated the stock market.
Just seven stocks have fueled much of the market's rally: Amazon, Apple, Alphabet, Microsoft, Meta, Nvidia, and Tesla. The Magnificent Seven have returned 148% since the end of 2022, drastically outperforming the 55% return for the rest of the S&P 500 index over that time. These tech behemoths have seen their earnings turbocharged by their market dominance in sectors such as cloud computing, software, and semiconductors.
AI infrastructure stocks have also started to take off. Data-center stocks like Vertiv and Digital Realty have soared as the demand to build out AI capacity has risen.
But now, so-called "Phase 3" AI stocks, which are rolling out the technology to increase their revenues, are set to shine, according to Goldman Sachs.
2025 will be the year of transition from investing in AI infrastructure to AI beneficiaries, Goldman's Chief US Equity Strategist David Kostin said. Two years after the debut of ChatGPT, more and more revenue-generating use cases for AI are emerging.
"While Phase 2 stocks may continue to outperform the broad equity market, we expect returns will be earnings-driven and the risk/reward for new capital appears more attractive within Phase 3," Kostin and his team wrote in a recent note.
Move over, Magnificent Seven
After an incredible two-year rally, it's may be difficult to see the Magnificent Seven cooling off. The stocks have shown impressive earnings growth in the last year and have come to dominate the market, making up about 30% of the S&P 500 by market cap. However, the growth that placed them there isn't sustainable for the long term, Kostin said.
That's not to say that the Magnificent Seven aren't solid companies. Goldman still expects them to outperform the rest of the index in 2025, but the bank is expecting them to do so by only 7%. For context, the Magnificent Seven outperformed the rest of the S&P 500 by 22% so far this year and 63% in 2023. Valuations for the market's biggest performers are overripe: the Magnificent Seven trade at a forward price-to-earnings ratio of 30x, while the rest of the index trades at a modest 19x.
That's where the AI Phase 3 trade comes in. These companies, whose revenues and earnings are set to get a boost from AI implementation, are valued much more reasonably, with the typical Phase 3 company trading at only 0.1 standard deviations more expensive than average, compared to 0.5 for Phase 2.
Valuations for Phase 3 stocks are depressed due to a recent decreased enthusiasm for AI, as some market experts have been questioning if AI is a trillion-dollar bubble ready to pop, according to Goldman Sachs.
Lower expectations for Phase 3 stocks isn't necessarily a bad thing, though — it makes it easier for these companies to beat investor expectations and increase their share price. On the other hand, expectations for Nvidia have risen so high that the stock still fell in after-hours trading in the wake of consensus-beating Q3 revenue performance.
"The share price performance of the companies in the infrastructure basket has dramatically outpaced their trajectory of earnings growth," Kostin said of Phase 2 companies. On the other hand, companies in the AI-enabled revenue group have seen share price growth in line with earnings growth. "And so our analysis is there's potential for multiple expansion in those stocks," Kostin added.
To find companies likely to see enhanced revenues from AI, Goldman Sachs analyzed recent messaging from company management regarding AI rollout. The bank identified the following 11 companies adopting AI to enhance their revenues as well as recent commentary from Q3 earnings calls indicating increased AI usage.
Earnings commentary: "Our appraisal solutions incorporate AI imaging for damage detection and real-time localized pricing that is condition-enhanced, based on millions of inspections in our data mode. It's still early days in this category, but we believe self-inspection can unlock a number of long-term growth opportunities, including TAM expansion."
Earnings commentary: "And with our recent Clumio acquisition, we're bringing innovative recovery capabilities to Amazon S3. This depth is paramount as many organizations rely on S3 to store large data and growing AI datasets."
Earnings commentary: "A rapidly growing AI company expanded their relationship with Cloudflare, signing a one-year, $7 million pool of funds contract for Workers AI. This company signed a $500,000 contract in Q2 for Cloudflare to be their 'platform for AI for inference, storage, image optimization and application security.' They quickly recognized the value of our platform and are now moving all of their workloads over to make Cloudflare their single inference cloud platform. With Workers AI, this customer is able to improve cost efficiency with our pay per inference model and also eliminate the need for a dedicated team to run and manage their infrastructure."
Earnings Commentary: "At the end of Q3, about 3,000 customers used one or more Datadog AI integrations to send us data about their AI, machine learning, and LLM usage. As some of these experiments start turning into production AI applications, we are seeing initial signs of traction for our LLM Observability product. Now, some of our growth is coming from AI-native customers, who this quarter represented more than 6% of our Q3 ARR, up from more than 4% in Q2 and about 2.5% of our ARR in the year-ago quarter."
Earnings commentary: "Revenue growth remained steady in the third quarter at 12% year over year, with solid performance in Core Cloud and continued growth in AI despite lapping difficult comps from our managed hosting price increase in April 2023 and from the Paperspace acquisition in July 2023. We continue to see momentum in demand for our AI/ML products, where Q3 ARR again grew close to 200% year-over-year."
Earnings commentary: "We closed a seven-figure expansion with a leading finance management platform. This customer had limited visibility into the thousands of incidents occurring in their production environment. They estimated that these incidents were costing them hundreds of thousands of dollars. By extending Dynatrace's AI-driven platform into their production environment, they gained substantive visibility and resultant business value."
Earnings commentary: "AI Security Operation was a fast-growing pillar, outpacing the overall market with 32% billings growth, accounting for 10.5% of our total business, up 2 points."
Earnings commentary: "We see great demand from our clients on the issues you'd expect, so like cybersecurity, how do they use artificial intelligence, data and analytics."
Earnings commentary: "Our strategy is to embed AI into every hub and across the entire platform and democratize AI for scaling companies. Since the launch, we have seen a notable increase in AI awareness, adoption and usage. AI app awareness within HubSpot grew by 13% quarter-over-quarter with two-thirds of Enterprise and half of Pro customers engaging with AI features. Copilot, our AI assistant, has resonated well, particularly with Starter customers who use it to summarize CRM data and objects, rewrite text and generate insights from their customer data. Copilot is now in public beta, and we are seeing repeat usage with 43% of users, which is a strong start."
Earnings commentary: "We've now boosted the product with GenAI and the outcome that we see is tremendous. This is up to a 20% lift that we see. Now these are solutions that our customers opt in to because they like those solutions, and they like the lift that they get out of that."
Earnings commentary: "ServiceNow has emerged as the AI platform for business transformation. The secular shift to AI is validated and is unfolding in real time. With Now Assist, we have 44 customers spending more than $1 million in ACV, including six over $5 million, and two over $10 million, and this continues to be our fastest-growing product ever, and an accelerant to our cross-enterprise expansion."
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