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 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.
Belden Inc. (NYSE:BDC)
Year To Date Share Price Gain: 56.34%
Number of Hedge Fund Investors in Q2 2024: 16
Belden Inc. (NYSE:BDC) is a data center operations and connectivity equipment provider. The firm’s products include copper cables, fiber cables, panels, cooling products, and airflow management products. These expose it directly to the growing data center market and imply that even if AI demand fails to take off, Belden Inc. (NYSE:BDC) will still be well positioned to benefit from pent up enterprise IT spending from the high interest rates. Its exposure to the data center industry has also allowed the firm to achieve sizeable revenue growth. Between 2020 and 2023, Belden Inc. (NYSE:BDC)’s revenue has grown from $1.7 billion to $2.5 billion, or by 47%. This hasn’t stopped the firm from focusing on growth, and it acquired a fiber company earlier this year to further increase broadband market penetration, particularly for enterprise and data center users. Over the long term, Belden Inc. (NYSE:BDC) expects its broadband revenue to account for 20% of its sales compared to the current figure of roughly 10%.
Belden Inc. (NYSE:BDC) management believes that the acquisition will help it penetrate the data center market. Here is what they shared during the Q2 2024 earnings call:
“So if you really look at Precision Optical Technologies, they’ve spent a lot of time building this position as a value-added supplier of optical transceivers with a lot of proprietary software and configuration capability, right, I think that’s unique. In many ways, that’s a little bit similar to how, for example, you can think of our active products on the industrial side. So you have this one capability that’s extremely differentiated, very sticky. And then, as a result, every time, for example, a big MSO customer has to do new infrastructure deployment or upgrades or any changes, it always starts at that end of their, let’s say, data center, where Precision is plugged in and all the discussions then come down to architectural design, so that they work through linked loss budgets and go from end to end, and then — so Precision was covering both ends.
Our Broadband business, pre-Precision, was covering that middle ground. And now we’re in a position where we connect all of that end-to-end, right? So we now participate — or we can participate in more systems architectural discussions. So how is that going? It’s still early days, obviously, Rob. We’ve disclosed, but the initial discussions with — between the two teams and with our customers have been very encouraging. We’ve already found a number of pull-through opportunities. We are bringing the teams together faster than we have done historically in terms of integration. So we are combining go-to-market more rapidly than we might have done in the past. And all our customers, in fact, as I may have mentioned on a previous call, part of that acquisition process was getting endorsement from some key customers.
And so they’ve really supported us during the process and they continue to support us as we roll this out. So, yes, I think in many ways, Precision Optical’s acquisition will allow our Broadband business to enter solutions in a way that would have been difficult organically because they didn’t have that kind of architecture in road into that discussion. So that is indeed the big change for us.”
Overall BDC ranks 15th on our list of Goldman Sachs’ top phase 2 AI stocks. While we acknowledge the potential of BDC 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 BDC 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.
