Goldman Sachs is signaling a major shift in AI investment strategy for 2025, moving away from the infrastructure-focused “Magnificent Seven” tech giants toward “Phase 3” AI stocks that are actively implementing AI to drive revenue growth. The Magnificent Seven—Amazon, Apple, Alphabet, Microsoft, Meta, Nvidia, and Tesla—have delivered an impressive 148% return since the end of 2022, vastly outperforming the rest of the S&P 500’s 55% return. However, Goldman’s Chief US Equity Strategist David Kostin warns that this extraordinary growth isn’t sustainable long-term.
The investment thesis centers on valuation disparities and growth potential. The Magnificent Seven currently trade at a forward price-to-earnings ratio of 30x, compared to just 19x for the rest of the index. Goldman expects these tech behemoths to outperform by only 7% in 2025, a dramatic slowdown from their 22% outperformance this year and 63% in 2023. Meanwhile, Phase 3 companies—those rolling out AI technology to boost revenues—trade at only 0.1 standard deviations above average valuations, compared to 0.5 for Phase 2 infrastructure stocks.
Goldman identified 11 companies positioned to benefit from AI implementation, analyzing recent management commentary from Q3 earnings calls. The list includes ACV Auctions (ACVA), which uses AI imaging for damage detection; Commvault Systems (CVLT), expanding AI dataset storage capabilities; Cloudflare (NET), whose AI customer expanded from a $500,000 contract to $7 million; Datadog (DDOG), reporting AI-native customers now represent over 6% of ARR, up from 2.5% a year ago; DigitalOcean (DOCN), seeing 200% year-over-year growth in AI/ML products; Dynatrace (DT), closing seven-figure AI-driven platform expansions; Fortinet (FTNT), with AI Security Operations growing 32%; Gartner (IT), experiencing strong client demand for AI guidance; Hubspot (HUBS), with two-thirds of Enterprise customers engaging AI features; Mastercard (MA), seeing up to 20% lift from GenAI integration; and ServiceNow (NOW), with 44 customers spending over $1 million on AI products.
The transition reflects AI’s maturation from infrastructure buildout to practical revenue generation, two years after ChatGPT’s debut. Lower expectations for Phase 3 stocks create opportunities for these companies to beat investor expectations, unlike Nvidia, which fell in after-hours trading despite beating Q3 revenue consensus due to sky-high expectations.
Key Quotes
2025 will be the year of transition from investing in AI infrastructure to AI beneficiaries
Goldman Sachs Chief US Equity Strategist David Kostin outlined the firm’s investment thesis, signaling a major strategic shift in how investors should approach AI stocks as the technology matures beyond infrastructure buildout.
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 explained why they believe AI implementation companies offer better risk-adjusted returns than infrastructure providers, despite the latter’s impressive recent performance.
The share price performance of the companies in the infrastructure basket has dramatically outpaced their trajectory of earnings growth
Kostin highlighted the valuation disconnect in Phase 2 AI infrastructure stocks, suggesting their stock prices have run ahead of fundamental earnings growth, creating potential downside risk.
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
ServiceNow’s earnings commentary demonstrates the scale of enterprise AI adoption, with multiple customers committing seven-figure annual contracts for AI products, validating the Phase 3 investment thesis with concrete revenue numbers.
Our Take
Goldman’s Phase 3 thesis represents sophisticated market timing based on AI’s maturation cycle. The firm isn’t abandoning the Magnificent Seven but recognizing that extraordinary returns require extraordinary growth, which becomes mathematically harder at trillion-dollar market caps. The valuation arbitrage opportunity is compelling: Phase 3 companies offer AI exposure without the premium multiples, creating asymmetric upside potential. What’s particularly noteworthy is the diversity of sectors represented—from cybersecurity to marketing platforms to payment processors—demonstrating AI’s horizontal applicability across industries. This isn’t a narrow technology play but a broad economic transformation. The concrete metrics cited—Datadog’s AI-native customers tripling, DigitalOcean’s 200% AI growth, Mastercard’s 20% performance lift—provide quantifiable evidence that AI is delivering measurable business value, not just generating headlines. For sophisticated investors, this analysis suggests a barbell strategy: maintain core Magnificent Seven positions for stability while allocating new capital to Phase 3 names for growth potential.
Why This Matters
This analysis signals a critical inflection point in AI investment strategy as the technology moves from hype-driven infrastructure spending to measurable business value creation. The shift from Phase 2 to Phase 3 represents AI’s transition from experimental technology to practical business tool, validating years of massive capital investment in AI infrastructure. For investors, this presents a potential opportunity to capture AI growth at more reasonable valuations while the Magnificent Seven face increasingly difficult comparisons and stretched multiples.
The broader implications extend beyond stock picking to validate AI’s real-world utility. Companies across diverse sectors—from cybersecurity to finance to cloud services—are demonstrating concrete revenue growth from AI implementation, not just cost savings or efficiency gains. This addresses skepticism about whether AI represents a trillion-dollar bubble, providing evidence that AI adoption is translating into tangible business outcomes. For businesses, the message is clear: AI implementation is becoming a competitive necessity, not an optional experiment. Companies successfully deploying AI are seeing significant performance improvements, from Mastercard’s 20% lift to DigitalOcean’s 200% AI product growth, setting new benchmarks for industry performance.
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Source: https://www.businessinsider.com/next-ai-stocks-to-buy-magnificent-7-growth-slows-goldman-2024-11