US Equity Views - The Next Phases of The AI Trade

14 March 2024 | 6:42PM EDT
US Equity Views
The next phases of the AI trade
AI optimism across US equities appears high, but not yet Tech Bubble or Ryan Hammond
+1(212)902-5625 |
post-COVID high. First, our estimate of market-implied long-term growth [email protected]
Goldman Sachs & Co. LLC
expectations has risen to 11%, above the long-term average of 9%, but still below
Daniel Chavez
the level during the Tech Bubble (16%) and late 2021 (13%). Second, among the +1(212)357-7657 |
[email protected]
largest 10 TMT stocks, FY3 EPS growth expectations for the typical stock equal Goldman Sachs & Co. LLC
15%, modestly above the S&P 500 median of 11% but lower than the typical TMT David J. Kostin
+1(212)902-6781 | [email protected]
stock in March 2000 (24%) and October 2021 (18%). Third, the valuation of the Goldman Sachs & Co. LLC
largest 10 TMT stocks equals 28x, which pales in comparison to the peak of the Tech Ben Snider
+1(212)357-1744 | [email protected]
For the exclusive use of Goldman Sachs Clients

Bubble (52x) and late 2021 (43x).
Cormac Conners
+1(212)357-6308 |
In addition to NVDA, investors frequently ask about potential beneficiaries as [email protected]
the AI trade broadens. NVDA has returned 522% since the start of 2022 and 84%
Jenny Ma
YTD alone. Notably, NVDA’s P/E ratio is roughly unchanged since the start of 2023, +1(212)357-5775 | [email protected]
with nearly all of its return attributable to a higher stream of earnings.
We highlight three subsequent phases of the AI trade. Phase 2: AI

“infrastructure” companies involved in the development, manufacturing, and
infrastructure of AI (semiconductors, cloud providers, equipment, data center REITs,
utilities, and security). Phase 3: AI “enabled” companies with business models that
can easily incorporate AI in product offerings to boost revenues (software and IT
services). Phase 4: AI “productivity” companies in labor-intensive industries that can
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harness AI technology to improve productivity and realize efficiency gains (software
and services, commercial and professional services).
Few stocks have kept pace with NVDA’s rally, but stocks in Phase 2 and Phase
3 have reflected more signs of AI optimism than stocks in Phase 4. We expect
investors will trade Phase 2 and Phase 3 faster than Phase 4, as many companies in
these two phases are necessary for every other company to use the technology to
improve productivity. Within Phase 2, Foundry & Integrated Device Manufacturers
have a relatively attractive setup of strong expected EPS growth with modest
valuations. Security stocks have strong earnings expectations, but could be
challenged by already elevated investor expectations. Select Utilities could represent
AI opportunities that are unpriced by analysts or investors.
Investors should consider this report as only a single factor in making their investment decision. For Reg AC
certification and other important disclosures, see the Disclosure Appendix, or go to
www.gs.com/research/hedge.html.
Goldman Sachs US Equity Views
GS Portfolio Strategy phases of the AI trade
120% 50x
6m return
99% Returns and valuations of AI phases
100% (median stock)
40x
80%
31x 31x 30x
60%
FY2 P/E
(right axis) 19x
20x
40% 16x
21% 10x
20% 14%
10%
0% 0x
Phase 1 Phase 2 Phase 3 Phase 4
NVDA Infrastructure Enabled revenues Productivity
(Exhibit 12) (Exhibit 16) (Exhibit 21)
Source: FactSet, Goldman Sachs Global Investment Research
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14 March 2024 2
AI optimism: High but not yet 2000 or 2021 high
The focus on artificial intelligence (AI) has re-intensified in 2024. Initial ebullience
about AI in 2023 drove a massive increase in public and investor focus on AI, as
measured by search volumes and news stories. These measures plateaued in 2H 2023,
albeit at a high level, but have surged again in 2024. Similarly, the share of S&P 500
companies mentioning AI on earnings calls dipped slightly from 35% in 2Q 2023 to 31%
in 3Q 2023. However, the share increased to 37% in 4Q 2023, led by Info Tech and
Comm Services.
Exhibit 1: Search interest in AI has surged again Exhibit 2: Mentions of AI on quarterly earnings calls ticked up
45 %
120
40 % 4Q23
100
Google Trends search Share of S&P 500 companies 37%
volume for AI 35 % mentioning "AI"
during quarterly earnings calls
80 30 % 3Q23
31%
25 %
60
20 %
40
15 %
20 10 %
5%
0
Dec-21 Jun-22 Dec-22 Jun-23 Dec-23
0%
2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
Source: Google Trends, https://www.google.com/trends, Goldman Sachs Global Investment Source: Goldman Sachs Global Investment Research
Research
Market-implied long-term growth expectations have risen, but have not reached
Tech Bubble or post-COVID levels. Similar to the residual income model approach
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used by Easton et al (2002), we use a cross-sectional regression of company return on
equity and price to book to solve for the market-implied long-term growth in residual
income (see Appendix for details). During the Tech Bubble, implied growth expectations
surged to 16%, above the long-term average of 9%, as investors applied unreasonably
high long-term growth expectations to companies. Today, the implied long-term growth
rate equals 11%, above long-term average but below the Tech Bubble period and
modestly below the level reached in late 2021 (Exhibit 3).
Some investors are concerned about the increase in analyst estimates of

“long-term” EPS growth, but those estimates can be distorted by the starting
point. Our implied long-term growth expectations generally tracks the path of analyst
3-5 year ahead EPS growth forecasts (“LTG”). However, a market-implied measure is
less sensitive to the starting point and reflects a much longer time horizon. As an
example, NVDA’s current LTG estimate equals 31%, but FY2 and FY3 EPS growth
estimates equal 18% and 7%. FY1 EPS growth of 93% appears to be lifting the
underlying “long-term” growth rate.
14 March 2024 3
Exhibit 3: Market-implied long-term growth

based on quarterly, cross-sectional regressions (see Appendix for details)
20 %
Tech
18 % Bubble Market-implied long-term
16% S&P 500 growth expectations
16 %
Post-
COVID
14 % 13%
Tax
reform
12 % 10%
10 % Long-term average 11%
8%
6%
4%
2%
0%
1995 2000 2005 2010 2015 2020 2025
Source: IBES, Goldman Sachs Global Investment Research
Among the largest stocks, nearer-term analyst estimates are optimistic, but
remain below the exuberance from the Dot Com Boom and late 2021. Among the
largest 10 TMT stocks, the typical company is forecast to deliver FY3 EPS growth of
15%, above the S&P 500 median of 11%. The distribution is anchored even lower, with
AMD and AMZN the outliers. At the height of the Tech Bubble, the typical TMT stock
was forecast to grow FY3 EPS by 24%, and in late 2021, the typical TMT stock was
expected to grow EPS by 18%.
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14 March 2024 4
Exhibit 4: Consensus FY3 EPS growth today vs. history

TMT defined as Info Tech, Comm Services, and AMZN
50%
45% AMZN Consensus FY3 EPS growth

estimate for 10 largest
40% TWX TMT stocks
35%
AMD
30% AMZN
25% Median
24%
20%
Median
SPX median 18% Median
15%
(15%) 15%
SPX median SPX median
10% MSFT (11%)
(10%)
AAPL NVDA
5%
0%
Dot Com Boom Post-COVID AI Boom
(Mar-2000) (Oct-2021) (Mar-2024)
Source: IBES, FactSet, Goldman Sachs Global Investment Research
The valuations of the largest TMT stocks today are elevated but also remain well
below the Tech Bubble and valuations reached just a few years ago in 2021. The
forward P/E of the 10 largest TMT stocks reached a peak of 52x in March 2000
(including MSFT 60x, CSCO 133x, INTC 45x, ORCL 108x, and IBM 27x). Today, the 10
largest TMT stocks (including MSFT 32x, AAPL 25x, NVDA 36x, AMZN 40x, and GOOGL
20x) trade at 28x forward EPS. The valuation of these stocks pales in comparison to the
height of the Tech Bubble and the growth stock euphoria of 2021 (43x). Nonetheless,
the valuation of the 10 largest TMT stocks today still ranks in the 88th percentile vs.
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history and the yield gap between these stocks and nominal bond yields is negative.
14 March 2024 5
Exhibit 5: Valuation of largest TMT stocks today pales in comparison to Tech Bubble
TMT defined as Info Tech, Comm Services, and AMZN
60x
52x
Median forward P/E
50x
10 largest
43x
TMT stocks
40x
30x 28x
20x
10x S&P 500
0x
1980 1985 1990 1995 2000 2005 2010 2015 2020 2025
Source: IBES, FactSet, Goldman Sachs Global Investment Research
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14 March 2024 6
Defining the phases of the AI trade
NVDA has been the largest near-term AI beneficiary, with earnings driving the
entirety of its 522% return since the start of 2023. NVDA sales appear on track to
increase by 300% in just 2 years. Despite AI optimism, the stock’s forward P/E is
virtually unchanged since the start of 2023.
Exhibit 6: NVDA sales have grown rapidly Exhibit 7: NVDA return since YE 2022 has been entirely
earnings-driven
$160 600 %
$143
NVDA sales 9%
$131 NVDA
$140 (consensus, $ billion) 20% 500 % Cumulative change
$109
since YE 2022
$120
79% 400 %
Forward EPS
$100
300 %
$80
$61
126% 200 % Price
$60
100 %
$40 $27 $27
61% 0%
Forward P/E
$17
$12 $11 53% 0%
$20 21% -7%
$0 (100)%
2018 2019 2020 2021 2022 2023 2024E 2025E 2026E Dec-22 Mar-23 Jun-23 Sep-23 Dec-23 Mar-24
Source: FactSet, Goldman Sachs Global Investment Research Source: FactSet, Goldman Sachs Global Investment Research
History demonstrates the challenges of maintaining rapid sales growth and

extremely high margins. Since 1985, there have been just 121 unique S&P 500
companies that historically been able to grow sales by 20%+ for 5 consecutive years
(out of 1,065 unique non-financial companies in total). Over the same time period, there
have been just 4 unique S&P 500 companies that have maintained EBIT margins greater
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than 50% for 5 consecutive years. In addition to realized fundamentals, the experience
from the Tech Bubble shows that failure to meet elevated expectations can be sufficient
to lead to a sharp valuation de-rating among the largest stocks (see US Weekly
Kickstart). We have previously shown that, on average, companies with high valuations
often struggle to grow into their multiples regardless of realized growth rates (see US
Weekly Kickstart).
14 March 2024 7
Exhibit 8: It has historically been difficult to deliver consecutive Exhibit 9: Less than 1% of companies have maintained 50%+ EBIT
years of rapid sales growth margins for 5 consecutive years
since 1985, excluding Financials and Real Estate since 1985, excluding Financials and Real Estate
100% 3%
90% 91% Share of unique S&P 500 companies Share of unique S&P 500 companies
with fast sales growth for with >50% EBIT margins for
80% consecutive years 2.3% consecutive years
77%
70% 72% 10%+ sales
growth 2%
60%
55%
50%
43% 1.1%
40% 39%
31% 1%
30% 0.8%
20%+ sales 26%
23% 21%
20% growth 18% 0.5%
15% 14% 0.4%
11% 11% 0.3%
10% 9% 7% 0.2%
6% 0.1% 0.1% 0.1%
4% 3%
0% 0%
1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10
Consecutive years Consecutive years
Source: Compustat, Goldman Sachs Global Investment Research Source: Compustat, Goldman Sachs Global Investment Research
In addition to NVDA, investors have been focused on a broadening of the AI trade.

We expect there will likely be three broad, subsequent stages of the AI trade.
n “Phase 1” (NVDA) initially kicked off in early 2023 with the emergence of ChatGPT-4
and focused primarily on NVDA as the clearest near-term AI beneficiary within public
equity markets.
n “Phase 2” (Infrastructure) will focus on those companies beyond NVDA that are
involved in the infrastructure necessary to build AI. Based on our framework, this
phase includes semiconductor firms, cloud providers, data center REITs, hardware
and equipment companies, security software stocks, and utilities companies. See
Exhibit 12 and Appendix for constituents.
n “Phase 3” (Enabled revenues) will focus on AI “enabled” companies with business
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models that can incorporate AI in product offerings to boost revenues. This phase
aligns with management commentary and stock performance of many software and
IT services companies. See Exhibit 16 for constituents.
n “Phase 4” (Productivity gains) will focus on all companies harnessing AI technology
to improve productivity, with the largest potential efficiency gains in labor-intensive
industries with jobs more exposed to AI automation. Based on our previous work,
Software and Services and Commercial and Professional Services have the largest
potential earnings boost from widespread AI adoption via labor productivity. See
Exhibit 21 and our Long-term AI Beneficiaries basket (GSTHLTAI) for constituents.
Few stocks have kept pace with NVDA’s rally, but stocks in Phase 2 and Phase 3
have reflected more signs of AI optimism than stocks in Phase 4. Based on
performance and valuation, investors have already started to price subsequent phases
of the AI trade. An equal-weighted basket of Phase 2 stocks is up 14% during the past 6
months, largely driven by valuation expansion. The GS Global Banking & Markets (GBM)
AI Hardware (GSTMTDAT) basket seeks to capture a similar theme and the GBM Power
Up America (GSENEPOW) basket captures many of the Utilities stocks in Phase 2.
14 March 2024 8
Phase 3 stocks are up 21%, primarily driven by valuation expansion. Phase 4 stocks
have seen limited valuation expansion. On average across all three phases, prices and
valuations have increased modestly during the past 6 months, suggesting the
broadening of the AI trade is in its early innings.
We expect investors will trade Phase 2 and Phase 3 faster than Phase 4, as many
companies in these two phases are necessary for every other company to use the
technology to improve productivity. The median stock in Phase 2 trades at 16x forward
earnings, compared with 31x for Phase 3 and 19x for Phase 4.
Exhibit 10: Phases of the AI trade as it broadens beyond NVDA

constituents in each group are defined and shown in Exhibits 12, 16, 21; performance and valuation relative to each stock’s industry group
118 118 118
116 116 116

AI productivity gains
AI infrastructure AI-enabled revenues
114 114 114 ("Phase 4")
("Phase 2") ("Phase 3")
112 112 112
110 110 110
108 108 108

Indexed relative return Indexed relative return
106 106 106
Indexed relative return
104 104 104
102 102 102

Indexed relative P/E
100 100 100
98 98 98 Indexed relative P/E

Indexed relative P/E
96 96 96
94 94 94
Sep-23 Dec-23 Mar-24 Sep-23 Dec-23 Mar-24 Sep-23 Dec-23 Mar-24
Source: Goldman Sachs Global Investment Research
Exhibit 11: Summary of AI Phases

Median stock
2024E
Mkt cap YTD Sales Earnings Net
Phase Name ($ bn.) return growth growth margins FY2 P/E
1 NVDA 2,272 84 % 79 % 91 % 52 % 31 x
2 AI Infrastructure 28 6 7 10 14 16
3 Enabled revenues 32 8 12 6 15 31
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4 Productivity 12 2 5 7 7 19
14 March 2024 9
Phase 2: AI infrastructure
One aspect of the broader AI trade will focus on the companies involved in AI
infrastructure. Our analysis is primarily focused on US companies; we therefore use
Russell 3000 stocks with market caps over $2 billion as a starting universe. However, to
capture key non-US companies, we also include relevant MSCI AC World stocks with
market caps over $50 billion. The companies in each grouping below are based on a
combination of GICS classifications as well as company business descriptions, filings,
websites, and earnings calls. We acknowledge that this list may not be comprehensive
and some companies have diverse business models beyond AI.
1. Semiconductors: Chips are the critical component to be able to train and utilize
artificial intelligence.
o Design: Companies that own the IP and Electronic Design Automation
software used to design and analyze integrated circuits and printed circuit
boards.
o Fabless designers ex-NVDA: The design and marketing, but not the
manufacturing, of semiconductor chips.
o Integrated Device Manufacturers (IDMs) and Foundry: The manufacturing
of semiconductor chips.
o Memory: Companies that manufacture memory units that are critical
components of processors.
o Manufacturing Equipment: Companies that provide equipment needed to
manufacture semiconductor chips.
2. Data Centers (Real Estate): Companies that own and operate physical data centers
are required to house servers needed to train and run AI models.
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3. Servers and Networking: To build and operate data centers and fit companies to
use AI, various hardware and equipment will be required.
4. Utilities: Demand from data centers will require increased electricity.
5. Cloud Providers: Cloud companies are required to train, run, and maintain AI
models through their computing and data storage solutions.
6. Security: Companies may need to rely on software companies for endpoint security.
14 March 2024 10
Exhibit 12: Phase 2 of the AI trade will likely focus on the broader AI infrastructure ecosystem
Average
correlation
Category Description Companies (ranked by market cap) with NVDA
Semiconductors
Firms that own the IP and Electronic Design

Design Automation software used to design and analyze ARM, SNPS, CDNS 0.49
integrated circuits and printed circuit boards.
Fabless Designer The design, but not the manufacturing, of AVGO, AMD, QCOM, MRVL, 2454 (TW), MPWR, LSCC,
0.48
(ex-NVDA) semiconductor chips. CRDO
Foundry &
Integrated Device The manufacturing of semiconductor chips. 2330 (TW), INTC, GFS 0.27
Manufacturer (IDM)
Companies that manufacture memory units that are

Memory 005930 (KR), MU, 000660 (KR), WDC 0.29
critical components of processors.
Manufacturing Companies that provide equipment needed to ASML-NL, AMAT, LRCX, 8035 (JP), KLAC, TER, ONTO,
0.45
Equipment manufacture semiconductor chips. MKSI, AEIS, ACLS, FORM, KLIC, UCTT, VECO
Companies that own and operate physical data

Data Centers
centers that are required to house servers needed AMT, EQIX, DLR, DBRG 0.19
(Real Estate)
to train and run AI models.
To build and operate data centers and fit CSCO, ANET, APH, SMCI, GLW, VRT, KEYS, HPE, NTAP,
Servers and Networking companies to use AI, various hardware and JBL, PSTG, NVT, COHR, SNX, FN, LFUS, SANM, BDC, 0.32
equipment will be required. LITE, VIAV, PLUS
NEE, SO, DUK, CEG, SRE, AEP, D, EXC, PCG, PEG, XEL,
Demand from data centers will require increased
Utilities WEC, ETR, FE, VST, PPL, AEE, CMS, AGR, NRG, EVRG, -0.05
electricity.
AES, BEPC, PNW, OGE, IDA, POR, BKH
Cloud companies are required to train, run, and
Cloud Provider maintain AI models through their computing and MSFT, AMZN, GOOGL, ORCL 0.50
data storage solutions.
Companies will need to rely on software companies

Security PANW, CRWD, PLTR, S 0.33
for endpoint security.
Universe based on Russell 3000 stocks with >$2 bn market cap and MSCI World stocks with >$50 bn market cap. ARM is a large US-listed semiconductor stock but is not in the Russell 3000. Stock
classifications based on a combination of company business descriptions, company website, GICS classificiations, and company earnings transcripts. Correlation with NVDA based on daily returns
during the past 6 months.
Source: Company data, FactSet, Goldman Sachs Global Investment Research
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There has been a wide distribution of returns among these groups, and among the
companies within each group. While AI alone is not driving stock performance in each
category, Security and Fabless Designers have performed best on average. The typical
Security stock is up 60% since September 2023, while the typical Fabless Designer is
up 47%. On the other hand, AI-exposed Utilities do not appear to have reflected much
optimism from potential demand increases (-2%).
14 March 2024 11
Exhibit 13: Distribution of returns among AI-exposed stocks in Phase 2
150 %
SMCI
Distribution of 6-month returns +339%
125 % by AI category
100 %
NVDA +99%
Max
75 %
60%
47%
50 % 38%
34%
Median 26% 26%
25 % 17%
13% 12%
SPW +13%
-2%
0%
Min
(25)%
(50)%
Security Fabless Manufacturing Memory Design Servers & Cloud Data Center Foundry & Utilities
(N=4) Designer Equipment (N=4) (N=3) Networking Provider (Real Estate) Integrated Mfg (N=28)
(N=8) (N=14) (N=21) (N=4) (N=4) (N=3)
Most Phase 2 companies have experienced valuation expansion on the back of AI

optimism, but earnings revisions have varied widely. Servers & Networking and
Foundry & IDM stocks have experienced minimal change to forward EPS but substantial
increases in valuation, as investor optimism about future growth prospects has front-run
analyst estimates. Memory and Cloud Providers have had earnings-led rallies.
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14 March 2024 12
Exhibit 14: Change in median stock forward EPS versus P/E during the past 6 months
40 %
More
35 % valuation
driven
Fabless More
30 %
Manufacturing Designer earnings
Equipment driven
25 %
Change in forward P/E

Servers &
20 %
Networking
Security
15 % Foundry & IDMs
10 % S&P 500 Design

Data Center Change in forward
5% (Real Estate) EPS vs. P/E
0%
Cloud Memory
Provider
(5)% Utilities
(10)%
(10)% 0% 10 % 20 % 30 % 40 % 50 %
Change in forward EPS
Within Phase 2, Foundry & IDMs have a relatively attractive setup of strong
expected EPS growth with modest valuations (Exhibit 14). We acknowledge that
many factors beyond AI affect growth expectations and valuation. Security stocks have
strong earnings expectations, but could be challenged by already elevated investor
expectations. The typical Security stock trades at 51x, well above the level implied by
FY3 EPS growth estimates. The potential benefits to Utilities appear largely unpriced by
analysts or investors. However, the sector is heavily regulated and is especially sensitive
to the macro backdrop, so structuring the trade on a relative basis (vs. other Utilities)
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would likely be key. Notably, NVDA has relatively low FY3 EPS growth expectations but
trades at 29x FY3 EPS, implying investors may expect earnings growth to be faster than
analysts expect today.
14 March 2024 13
Exhibit 15: Growth vs. valuation for median stock in Phase 2 categories
50 x Security
FY3 EPS growth

45 x
vs. P/E
40 x
Design
35 x
FY3 P/E
30 x Cloud
NVDA
Provider
25 x
Data Center Fabless
(Real Estate) Designer
20 x
Manufacturing
Equipment
15 x Servers & Foundry & IDMs
S&P 500 Networking
10 x Utilities
Memory
5x
0% 4% 8% 12 % 16 % 20 % 24 % 28 % 32 %
FY3 EPS growth
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14 March 2024 14
Phase 3: AI-enabled revenues
Phase 3 of AI adoption will likely look beyond the development of AI infrastructure

and focus on “enabled” companies that can incorporate AI into product offerings
that generate revenues. Software and IT Services seem best positioned for this phase
of the AI adoption cycle, with many companies describing how their tools will enable
other companies to utilize AI. Our software and internet analysts have started to
highlight the potential boost for AI-enabled companies under their coverage.
We screen for companies that mention revenue-enhancing AI use cases in 4Q

earnings call that also trade with strong correlations to NVDA. We first screen for
Russell 3000 companies, outside of Phase 2 stocks, that trade with a statistically
significant beta to NVDA, after controlling for sensitivities to the equal-weight S&P 500
and the nominal 10-year Treasury yield. We then identified companies in this universe
with relevant mentions of AI during 4Q earnings calls. We remove stocks discussing AI
through an efficiency lens or without a clear product offering/use case.
The typical stock in the screen for Phase 3 stocks has returned 8% YTD and trades
at a forward P/E of 31x (Exhibit 16). The outperformance of these stocks, while driven
by many factors other than exclusively AI, suggests investors have begun to trade Phase
3 already.
We acknowledge there are drawbacks to this quantitative approach. First, some

companies may fall into multiple phases of the AI trade, but we exclude firms in Phase 2
for clarity. Second, there may be some companies that may discuss AI during 4Q
earnings calls but trade with no or negative correlation to NVDA. These stocks
theoretically could be unpriced AI-enabled companies. Third, some companies may not
discuss AI use cases during 4Q earnings calls but are highly correlated with NVDA. This
dynamic could imply that investors believe the firms have some AI exposure that a
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transcript analysis does not capture.
14 March 2024 15
Exhibit 16: Select AI “enabled” companies with strong correlation to NVDA that discuss AI use cases during 4Q earnings calls
based on regression of daily returns against NVDA, equal-weight S&P 500, and nominal 10-year UST yield since September
Sensitivty
Mkt cap YTD Forward to NVDA
Ticker Name Industry ($ billion) return P/E (t-stat)
META Meta Platforms Inc Interactive Media & Services 1,290 40 % 21 x 5.7
MDB MongoDB, Inc. IT Services 27 (9) 99 5.3
INTU Intuit Inc. Software 182 5 32 5.1
NTNX Nutanix, Inc. Software 15 36 40 4.9
NOW ServiceNow, Inc. Software 155 10 46 4.7
ACN Accenture Plc IT Services 234 8 27 4.2
ACVA ACV Auctions, Inc. Commercial Services & Supplies 3 16 33 4.0
ADBE Adobe Inc. Software 253 (4) 27 3.8
QTWO Q2 Holdings, Inc. Software 3 16 26 3.7
NET Cloudflare Inc IT Services 33 15 118 3.7
UBER Uber Technologies, Inc. Ground Transportation 161 27 36 3.6
ADSK Autodesk, Inc. Software 55 6 28 3.6
ZS Zscaler, Inc. Software 30 (9) 53 3.4
MA Mastercard Inc. Financial Services 438 12 27 3.4
DT Dynatrace, Inc. Software 14 (15) 30 3.3
CRM Salesforce, Inc. Software 297 16 27 3.3
AAPL Apple Inc. Tech Hardware 2,668 (11) 23 3.2
HUBS HubSpot, Inc. Software 31 8 71 3.2

BOX Box, Inc. Software 4 16 16 3.2
IT Gartner, Inc. IT Services 36 6 35 3.1
BASE Couchbase, Inc. IT Services 1 24 NM 3.0
DOCN DigitalOcean Holdings, Inc. IT Services 4 11 21 2.9
YEXT Yext, Inc. Software 1 (4) 13 2.9
CARG CarGurus, Inc. Interactive Media & Services 2 (6) 14 2.8
CVLT Commvault Systems, Inc. Software 4 25 27 2.8
SNOW Snowflake, Inc. IT Services 53 (18) 112 2.8
FTNT Fortinet, Inc. Software 55 20 35 2.8
WK Workiva Inc. Software 5 (17) 65 2.8
GTLB GitLab, Inc. Software 9 (12) 113 2.7
SQSP Squarespace, Inc. IT Services 4 (2) 26 2.6
DDOG Datadog Inc Software 40 2 65 2.6
List median 31 8% 31 x 3.3
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14 March 2024 16
Phase 4: AI productivity
Eventually, the AI trade will focus on companies across a variety of industries that
can embrace the technology to improve their productivity. Our framework for
estimating the potential earnings boost from AI adoption via labor productivity combines
the share of a company’s wage bill exposed to AI automation with the labor cost share
of the company. Assuming either stable margins or stable revenues, we calculate the
implied earnings boost from AI automation. We previously estimated the boost for the
typical Russell 1000 stock would be 11% through a revenue channel or 26% through a
margin channel. At the industry group level, Software & Services and Commercial &
Professional Services have the largest potential earnings gains from AI adoption via
labor productivity. These three industries have a combination of a high share of their
wage bill exposed to AI automation and relatively high labor costs (see US Equity
Views).
Exhibit 17: Potential productivity gains from widespread AI adoption

see US Equity Views for details
45%
Exposure to automation by AI Software & Services
40% vs. labor costs as % of revenues
(Russell 1000 industry median)
35%
Labor costs as % of revenues
30% Comm & Prof

Services
25%
Pharma & Biotech
HC Equip & Svcs
20% Transportation Banks
Capital Goods
Consumer Media & Ent
15% Services Financial Svcs
Russell 1000 Tech Hardware
Materials Autos Semis
10% Utilities
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Staples Retail HH & Personal Products
Disc. Retail Insurance
5%
Equity REITs
Energy
0%
24% 26% 28% 30% 32% 34% 36% 38% 40% 42%
Exposure to automation by AI
Source: Company filings, Revelio, Goldman Sachs Global Investment Research
Consistent with the expected productivity gains, Software & Services and
Commercial & Professional Services account for 30% of productivity-related AI
mentions during 4Q earnings season. We only include companies where
managements discussed AI in the explicit context of efficiency, productivity, or cost. The
transcript analysis helps overlay potential gains from AI adoption with managements
likely to embrace the technology to harness those gains.
14 March 2024 17
Exhibit 18: Breakdown of mentions of AI during 4Q earnings season Exhibit 19: Labor-intensive industries mentioned AI efficiency most
as of March 1; unique companies as a share of total mentions in the frequently
explicit context of productivity
Other Software & 44 %

15% Services Inudstry share of companies
16% 40 % mentioning AI efficiency Software & Services
Pharma Biotech vs. labor costs as a
& Life Sci 36 %
share of revenue
2%
Labor costs as a % of revenue

32 %
Banks Pharma Biotech &
2% 28 % Life Sci
Transportation Health Care Equip &
Commercial & Services
3% Professional 24 %
Consumer Services
Services Banks Media &
Capital Goods 14% 20 % Entertainment
4% Transportation
16 % Capital Telecom Services
Consumer Discret Goods
12 % Semis Cons Discret Distrib
Distribution & Utilities & Retail Real Estate Mgmt &
Retail
8% Dev
5% Energy Insurance
Media & Cons Staples Distrib
Financial 4% Equity REITs & Retail
Entertainment
Services R² = 0.23
12%
9% Health Care 0%
Consumer Equipment & 0% 2% 4% 6% 8% 10 % 12 % 14 % 16 % 18 % 20 %
Services Services Industry share of companies mentioning AI efficiency
9% 9%
Source: FactSet, Goldman Sachs Global Investment Research Source: Company filings, FactSet, Goldman Sachs Global Investment Research
Most companies that discussed AI mentioned it broadly in the context of

productivity and efficiency gains. However, many companies specifically called out
the goal of lowering costs. Our economists expect generative AI will largely be
output-enhancing, as employees have more free time to increase revenues. Many
companies spoke about generative AI in a similar manner. However, AI could also act as
a tailwind to profitability. We highlight some examples, but not a comprehensive list, of
companies that discussed AI through a cost lens in 4Q earnings transcripts.
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14 March 2024 18
Exhibit 20: Sample 4Q company commentary on AI and cost savings

Ticker Sector Commentary
As we are now seeing the impact of our earlier cost reductions, the efficiencies we're driving through the business from AI and other technology-
ACCD Health Care driven innovations, and the incremental margin impact of customers implementing multiple offerings and associated utilization-based revenues,
we see profitable growth from here and believe we can deliver an annual improvement of 300 to 400 basis points over the horizon to fiscal 2029.
By leveraging generative AI combined with machine learning to take the capability of our people to an even higher level, Robinson is positioned
CHRW Industrials well to further reduce waste and drive structural cost changes that improve our operating leverage and help deliver on the long-term operating
income margin expectations.
...we anticipate a gradual improvement in non-GAAP operating margin through fiscal year 2024, reflecting ongoing efforts to optimize Amdocs'
cost structure and the cumulative benefits of our continual initiatives to improve operational excellence. This includes the adoption of
DOX Information Technology
automation, other sophisticated tools and disciplined resource management, added to which we expect the implementation of gen AI to drive
additional cost and efficiency improvements across our business.
And then finally, as you know, we took some actions at the end of last year around our disciplined operating cost efficiencies, and we expect to
ELV Health Care
see even greater benefits from those as we digitize and use AI in our investments.
We have significant opportunity to run more efficiently across the company, to eliminate redundant systems, to keep optimizing in the cloud, and
utilize the latest productivity capabilities from AI. In addition, we will keep leveraging our technology leadership to find opportunities for
EXPE Consumer Discretionary
decreasing costs while increasing customer experience...By building better technology and self-service tools, we have both improved our NPS
and created massive efficiencies, all while maintaining our best-in-class service, and generative AI will only accelerate this trend.
...our longer-term financial objective of obtaining double-digit operating margins. We believe the key contributors are increased scale,
KFRC Industrials productivity improvements, including through our back-office transformation program and advancements in AI technologies, driving a greater
mix of managed teams and solutions business, and further reducing our fixed costs such as real estate.
The new ERP is expected to provide leading-edge functionality, including AI capabilities, allowing us to automate and streamline our processes
MRC Industrials
and systems to improve reporting, forecasting, and controls. It will also reduce IT maintenance costs by approximately $2 million a year.
And importantly, as you know, we are adopting AI across the business, which we expect to save time, increase productivity and drive scalability
MRNA Health Care
in addition to cost savings. Our use of AI is increasing by the week.
MTCH Communication Services While AI brings with it cost efficiencies and a potent optimization tool, we view it as far more than just that.
And we're already seeing very interesting trends in the ability of AI to reduce costs related to technology spend, to the creation of code, to the
NWSA Communication Services cultivation of code. And so not only are we going to be pursuing our conventional costs, but we're looking ahead and trying to make the most of
new developments.
The combination of process reengineering, automation and AI is still in progress, but we have already seen positive savings and have a target of
PANW Information Technology
automating 90% of the more than 300,000 manual interventions.
We're also using AI tools to optimize fill rates and for dynamic routing sourcing optimization, $200 million to $300 million of savings opportunity
PG Consumer Staples
across these areas.
We're also in the process of launching several cost savings initiatives. These include automation and AI programs, such as the expanded use of
SPTN Consumer Staples Tally, our in-stock robot, which will appear in 75 stores this year. We're also implementing an automated workforce planning tool and inventory
validation warehouse drones.
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...we're very excited about generative AI. There are big opportunities for us to improve the customer and member experience, improve associate
WMT Consumer Staples
experiences and productivity and to help take costs out of the business, and we're moving.
Our Long-term AI basket (GSTHLTAI) offers investors a list of stocks with the
largest potential EPS upside from AI adoption via labor productivity. We create the
basket based on the average of the two approaches: 1) revenue boost and stable
margins, 2) margin boost and stable revenues. See US Equity Views for details. We
expect this phase of AI adoption will occur gradually over the next few years. 12
companies in our 50-stock Long-term AI basket mentioned potential productivity gains
from AI adoption during 4Q earnings season: AMZN, CPNG, CTSH, DXC, HRB, HUBS,
NWSA, NYT, PINS, RCM, RHI, WMT. See Exhibit 21 for the constituents of GSTHLTAI.
Since early 2023, GSTHLTAI has outperformed by less than the other groups of AI
beneficiaries, suggesting much of the broader productivity gains have yet to be
priced in. Commentary from 4Q earnings season left the question of timing largely
unresolved: Some companies highlighted an impact of AI on their business already,
14 March 2024 19
while others expected an impact in coming years.
Exhibit 21: Constituents of GSTHLTAI basket

see US Equity Views for basket construction details
Share of Potential chg Share of Potential chg
YTD wage bill Labor to baseline YTD wage bill Labor to baseline
Mkt cap total NTM exposed costs as earnings Mkt cap total NTM exposed costs as earnings
Ticker Name ($ bn) return P/E to AI % sales from AI Ticker Name ($ bn) return P/E to AI % sales from AI
Communication Services Industrials
PINS Pinterest, Inc. $23 (7)% 24x 35 % 34 % 162 % CLVT Clarivate PLC $5 (24)% 9x 38 % 23 % 232 %
NYT New York Times Company 7 (10) 25 36 43 67 RHI Robert Half Inc. 8 (8) 22 38 85 150
NWSA News Corp. 15 8 32 36 19 63 CDAY Ceridian HCM Holding, Inc. 11 1 39 38 43 125
ZI ZoomInfo Technologies Inc 6 (12) 16 35 46 58 TTEK Tetra Tech, Inc. 10 10 28 35 72 122
SAIC Science Applications International Corp. 7 16 17 36 33 115
Consumer Discretionary
HRB H&R Block, Inc. $7 (1)% 10x 41 % 52 % 57 % Information Technology
KSS Kohl's Corp. 3 (12) 10 32 7 49 GWRE Guidewire Software, Inc. $10 5% 77x 37 % 80 % 388 %
CPNG Coupang, Inc. 33 21 50 35 9 49 AYX Alteryx, Inc. 3 2 35 36 74 203
KMX CarMax, Inc. 13 8 23 33 5 42 MDB MongoDB, Inc. 27 (9) 142 36 83 193
AMZN Amazon.com, Inc. 1,849 16 40 33 10 39 NTNX Nutanix, Inc. 15 36 52 36 70 177
LEA Lear Corp. 8 2 9 33 7 30 SMAR Smartsheet, Inc. 5 (14) 41 36 75 171
SNOW Snowflake, Inc. 53 (18) 160 36 90 154
Consumer Staples TWLO Twilio, Inc. 11 (18) 22 37 60 138
WMT Walmart Inc. $491 17 % 26x 31 % 9% 44 % DXC DXC Technology Co. 4 (9) 6 38 40 95
WBA Walgreens Boots Alliance, Inc. 18 (18) 6 36 6 38 BILL BILL Holdings, Inc. 7 (17) 27 38 60 93
COST Costco Wholesale Corp. 325 11 44 31 6 31 HUBS HubSpot, Inc. 32 8 87 36 66 91
ACN Accenture Plc 237 8 29 37 60 80
Energy ESTC Elastic NV 11 (6) 78 36 46 76
OXY Occidental Petroleum Corp. $55 4% 17x 31 % 6% 9% CTSH Cognizant Technology Solutions Corp. 38 2 16 38 58 76
WMB Williams Companies, Inc. 45 7 20 32 6 9
Materials
Financials IP International Paper Company $13 2% 16x 31 % 16 % 41 %
KMPR Kemper Corp $4 21 % 13x 42 % 11 % 42 %
BRO Brown & Brown, Inc. 24 20 24 39 41 40 Real Estate
FAF First American Financial Corp. 6 (12) 13 43 16 38 JLL Jones Lang LaSalle Incorporated $9 (2)% 15x 35 % 30 % 120 %
WTW Willis Towers Watson 28 14 16 39 34 36
MMC Marsh & McLennan Companies, Inc. 102 10 24 39 28 30 Utilities
FNF Fidelity National Financial, Inc. 14 1 10 42 15 30 HE Hawaiian Electric Industries, Inc. $1 (21)% 5x 33 % 12 % 26 %
VOYA Voya Financial, Inc. 7 (2) 8 39 18 30
List median $11 2% 22x 36 % 34 % 72 %
Health Care Russell 1000 median 14 4 19 33 14 19
THC Tenet Healthcare Corp. $10 33 % 16x 33 % 31 % 135 %
DVA DaVita Inc. 12 32 14 34 41 105
UHS Universal Health Services, Inc. 12 15 13 33 35 91
IQV IQVIA Holdings Inc 46 10 22 38 61 77
RCM R1 RCM Inc 6 32 51 38 23 77
EHC Encompass Health Corp. 7 14 18 34 34 68
ILMN Illumina, Inc. 20 (5) 108 34 33 54
Source: Company filings, Revelio, Goldman Sachs Global Investment Research
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14 March 2024 20
Appendix
Implied long-term growth estimates

To estimate the implied long-term growth rate, we use an approach developed in
academic literature by Peter Easton et al (2002) that relies on the residual income
valuation model. The residual income valuation model equates a stock’s price with the
sum of book value and the discounted present value of expected “residual” income, or
earnings in excess of the cost of equity capital times equity capital (Exhibit 22).
Assuming a finite horizon period and rearranging this model, their approach
simultaneously solves for the implied rate of return on equity (“cost of equity”) and the
perpetual growth rate in residual income by using a cross-sectional regression of
company data. We exclude companies with negative book value and exclude companies
with extreme observations.
Exhibit 22: Framework for solving for implied cost of equity and growth rate
see “Using forecasts of earnings to simultaneously estimate growth and the rate of return on equity investment”
Easton et al (2002)
∞ E0 [ Xt - r * Bt-1 ]
P0 = B0 + Σ t
1 (1+r)
Residual income
where:
P = price X = earnings per share
B = book value per share r = expected rate of return on equity
E = expectations at time 0
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14 March 2024 21
Phase 2 constituents
Exhibit 23: Constituents of Phase 2

Company Ticker Category
Microsoft Corporation MSFT Cloud provider
Amazon.com AMZN Cloud provider
Alphabet Inc. GOOGL Cloud provider
Oracle Corporation ORCL Cloud provider
American Tower Corporation AMT Data Center (Real Estate)
Equinix EQIX Data Center (Real Estate)
Digital Realty Trust DLR Data Center (Real Estate)
DigitalBridge Group DBRG Data Center (Real Estate)
ARM Holdings PLC ADR ARM Design
Synopsys SNPS Design
Cadence Design Systems CDNS Design
Broadcom Inc. AVGO Fabless designer
Advanced Micro Devices AMD Fabless designer
QUALCOMM Incorporated QCOM Fabless designer
MediaTek Inc 2454-TW Fabless designer
Marvell Technology MRVL Fabless designer
Monolithic Power Systems MPWR Fabless designer
Lattice Semiconductor Corporation LSCC Fabless designer
Credo Technology Group Holding Ltd. CRDO Fabless designer
Taiwan Semiconductor Manufacturing Co. 2330-TW Foundry & IDMs
Intel Corporation INTC Foundry & IDMs
GlobalFoundries Inc. GFS Foundry & IDMs
ASML Holding NV ASML-NL Manufacturing Equipment
Applied Materials AMAT Manufacturing Equipment
Lam Research Corporation LRCX Manufacturing Equipment
Tokyo Electron Ltd. 8035-JP Manufacturing Equipment
KLA Corporation KLAC Manufacturing Equipment
Teradyne TER Manufacturing Equipment
Onto Innovation ONTO Manufacturing Equipment
MKS Instruments MKSI Manufacturing Equipment
Advanced Energy Industries AEIS Manufacturing Equipment
Axcelis Technologies ACLS Manufacturing Equipment
FormFactor FORM Manufacturing Equipment

Kulicke & Soffa Industries KLIC Manufacturing Equipment
Ultra Clean Holdings UCTT Manufacturing Equipment
Veeco Instruments Inc. VECO Manufacturing Equipment
Samsung Electronics Co. 005930-KR Memory
Micron Technology MU Memory
SK hynix Inc. 000660-KR Memory
Western Digital Corporation WDC Memory
Palo Alto Networks PANW Security
CrowdStrike Holdings CRWD Security
Palantir Technologies Inc. PLTR Security
SentinelOne S Security
Cisco Systems CSCO Servers and Networking
Arista Networks ANET Servers and Networking
Super Micro Computer SMCI Servers and Networking
Amphenol Corporation APH Servers and Networking
Vertiv Holdings Co. VRT Servers and Networking
Corning Inc GLW Servers and Networking
Keysight Technologies Inc KEYS Servers and Networking
Hewlett Packard Enterprise Co. HPE Servers and Networking
NetApp NTAP Servers and Networking
Jabil Inc. JBL Servers and Networking
Pure Storage PSTG Servers and Networking
nVent Electric plc NVT Servers and Networking
Coherent Corp. COHR Servers and Networking
TD SYNNEX Corporation SNX Servers and Networking
Fabrinet FN Servers and Networking
0d74b2afc2134a2d9694ccd9a530a507
Littelfuse LFUS Servers and Networking
Sanmina Corporation SANM Servers and Networking
Belden Inc. BDC Servers and Networking
Lumentum Holdings LITE Servers and Networking
Viavi Solutions Inc VIAV Servers and Networking
ePlus inc. PLUS Servers and Networking
NextEra Energy NEE Utilities
Southern Company SO Utilities
Duke Energy Corporation DUK Utilities
Constellation Energy Corporation CEG Utilities
Sempra SRE Utilities
American Electric Power Company AEP Utilities
Dominion Energy Inc D Utilities
Exelon Corporation EXC Utilities
PG&E Corporation PCG Utilities
Public Service Enterprise Group Inc PEG Utilities
Xcel Energy Inc. XEL Utilities
WEC Energy Group Inc WEC Utilities
Entergy Corporation ETR Utilities
FirstEnergy Corp. FE Utilities
Vistra Corp. VST Utilities
PPL Corporation PPL Utilities
Ameren Corporation AEE Utilities
CMS Energy Corporation CMS Utilities
Avangrid AGR Utilities
NRG Energy NRG Utilities
Evergy EVRG Utilities
AES Corporation AES Utilities
Brookfield Renewable Corp. BEPC Utilities
Pinnacle West Capital Corporation PNW Utilities
OGE Energy Corp. OGE Utilities
IDACORP IDA Utilities
Portland General Electric Company POR Utilities
Black Hills Corporation BKH Utilities
14 March 2024 22
Disclosure Appendix
Reg AC
We, Ryan Hammond, Daniel Chavez, David J. Kostin, Ben Snider, Cormac Conners and Jenny Ma, hereby certify that all of the views expressed in this
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Unless otherwise stated, the individuals listed on the cover page of this report are analysts in Goldman Sachs’ Global Investment Research division.
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US Equity Views - The Next Phases of The AI Trade

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US Equity Views - The Next Phases of The AI Trade

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14 March 2024 | 6:42PM EDT

The next phases of the AI trade

Goldman Sachs & Co. LLC

We highlight three subsequent phases of the AI trade. Phase 2: AI

GS Portfolio Strategy phases of the AI trade

Source: FactSet, Goldman Sachs Global Investment Research

AI optimism: High but not yet 2000 or 2021 high

Some investors are concerned about the increase in analyst estimates of

Exhibit 3: Market-implied long-term growth

10 % Long-term average 11%

1995 2000 2005 2010 2015 2020 2025

Source: IBES, Goldman Sachs Global Investment Research

Exhibit 4: Consensus FY3 EPS growth today vs. history

45% AMZN Consensus FY3 EPS growth

(Mar-2000) (Oct-2021) (Mar-2024)

Source: IBES, FactSet, Goldman Sachs Global Investment Research

10x S&P 500

Source: IBES, FactSet, Goldman Sachs Global Investment Research

Deﬁning the phases of the AI trade

History demonstrates the challenges of maintaining rapid sales growth and

In addition to NVDA, investors have been focused on a broadening of the AI trade.

Exhibit 10: Phases of the AI trade as it broadens beyond NVDA

116 116 116

110 110 110

108 108 108

102 102 102

100 100 100

98 98 98 Indexed relative P/E

Source: Goldman Sachs Global Investment Research

Exhibit 11: Summary of AI Phases

Firms that own the IP and Electronic Design

Companies that manufacture memory units that are

Companies that own and operate physical data

Companies will need to rely on software companies

Source: Company data, FactSet, Goldman Sachs Global Investment Research

Exhibit 13: Distribution of returns among AI-exposed stocks in Phase 2

Source: FactSet, Goldman Sachs Global Investment Research

Most Phase 2 companies have experienced valuation expansion on the back of AI

Change in forward P/E

10 % S&P 500 Design

Change in forward EPS

Source: FactSet, Goldman Sachs Global Investment Research

FY3 EPS growth

Source: FactSet, Goldman Sachs Global Investment Research

Phase 3: AI-enabled revenues

Phase 3 of AI adoption will likely look beyond the development of AI infrastructure

We screen for companies that mention revenue-enhancing AI use cases in 4Q

We acknowledge there are drawbacks to this quantitative approach. First, some

HUBS HubSpot, Inc. Software 31 8 71 3.2

List median 31 8% 31 x 3.3

Exhibit 17: Potential productivity gains from widespread AI adoption

30% Comm & Prof

Source: Company ﬁlings, Revelio, Goldman Sachs Global Investment Research

Other Software & 44 %

Labor costs as a % of revenue

Most companies that discussed AI mentioned it broadly in the context of

Exhibit 20: Sample 4Q company commentary on AI and cost savings

Source: Goldman Sachs Global Investment Research

while others expected an impact in coming years.

Exhibit 21: Constituents of GSTHLTAI basket

Source: Company ﬁlings, Revelio, Goldman Sachs Global Investment Research

Implied long-term growth estimates

Exhibit 23: Constituents of Phase 2