Goldman Sachs Group Inc.'s Jim Covello urged investors to tilt toward major hyperscalers instead of semiconductor makers to benefit from the ongoing AI infrastructure expansion.
Covello, who serves as co-head of equity research and covers semiconductors, conveyed the view in a note to clients on Thursday. He said the market appears to be pricing in skepticism about whether hyperscalers will achieve attractive returns on their investments - a stance that is reflected in lower valuation multiples for that group.
The recommendation stands in contrast to the recent traction seen in chip stocks. Over the past several months, semiconductors have been the favored route for investors seeking exposure to artificial intelligence, while large cloud and internet platform companies have lagged. Companies identified as hyperscalers in the note include Amazon.com Inc. (NASDAQ:AMZN), Oracle Corp. (NYSE:ORCL), Microsoft Corp. (NASDAQ:MSFT), Alphabet Inc. (NASDAQ:GOOGL) and Meta Platforms Inc. (NASDAQ:META). Investors have been questioning those firms' capital spending on data centers, a dynamic that has weighed on their shares.
By contrast, the Philadelphia Stock Exchange Semiconductor Index has seen strong performance, gaining nearly 150% in the past year.
Covello set out two scenarios in which the relative-value trade - favoring hyperscalers over chipmakers - would prove successful. The note describes the first scenario in detail: hyperscalers would demonstrate positive returns on investment, which would alleviate investor concerns about their capital expenditures and support a rebound in valuations. In that outcome, chip stocks would likely show less incremental upside because the market has already assigned them substantial gains.
The note references a second scenario as part of the framework for the trade, but the details of that alternative were not provided in the material summarized here.
Context and implications
Covello's recommendation highlights a relative-value approach built on current market pricing: hyperscalers are trading with compressed multiples due to ROI concerns, while semiconductors have experienced significant appreciation. The trade therefore depends on whether market perceptions of hyperscaler capital efficiency change materially.
Investors assessing this view should weigh the recent outperformance in semiconductors against the darker sentiment toward hyperscalers' data-center spending, recognizing that the note identifies a path for valuation recovery if hyperscaler ROI becomes clearer.