AI investments are ‘justified’ and ‘sustainable’ as long as companies sees outsized productivity revenue – GS

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Artificial intelligence spending justifies the current investments in tech and infrastructure and is seen as sustainable, according to Goldman Sachs.

Economists are forecasting that AI-related spending will reach approximately $300B in 2025, driven by significant investments from tech giants.

As these investments – OpenAI’s (OPENAI [https://seekingalpha.com/symbol/OPENAI]) $300B deal with Oracle, a $100B investment from Nvidia (NVDA [https://seekingalpha.com/symbol/NVDA]), and strategic partnerships with AMD (AMD [https://seekingalpha.com/symbol/AMD]) and Broadcom (AVGO [https://seekingalpha.com/symbol/AVGO]) for GPU and custom AI chip deployment in recent months – will add to “an already sizable amount of AI capex,” Joseph Briggs, senior economist at Goldman Sachs, said.

The technological backdrop remains supportive of continued AI investment growth despite concerns about the sustainability of such massive capital expenditures, he said, projecting a 15% gross uplift to economy-wide U.S. labor productivity following full AI adoption over a 10-year period, with academic studies and company anecdotes pointing to “25-30% average productivity gains following the deployment of AI applications.”

Though current AI applications are still limited, primarily focusing on coding, customer service, and consulting support, these early estimates highlight significant potential.

In addition, computational power necessary to train large language models is growing at approximately 400% per year, while computational costs are only falling at around 40% annually, Briggs added.

“The punchline from these trends is that investment in computation and power capacity should increase as long as the differential between demand growth and computing cost declines remains wide,” he explained.

The economic value created by generative AI in the U.S. is estimated at $20T in present discounted value, with $8T projected to flow to U.S. companies as capital revenues.

And despite the unprecedented scale of AI investments, Goldman Sachs economists note that current AI investment in the U.S. remains below 1% of GDP, “a large but not outsized impulse by historical standards.”

Briggs said this level is justifiable given the potential economic gains promised by generative AI.

However, he acknowledged legitimate concerns about whether companies making investments today will ultimately benefit from this spending.

According to Goldman Sachs’ analysis, the 18% depreciation rate for current AI capital expenditures raises “some potential for mismatch between the timing of infrastructure build and revenue realization,” Briggs said.

“The ultimate winners from infrastructure builds are determined by a complex set of factors including timing, regulation, and market competition.”

Briggs concluded that AI investment levels appear sustainable as long as companies believe they will generate outsized returns over the long term.

“We expect that the solid macro backdrop will support capex for as long as companies believe that a first-mover advantage will allow them to capture an outsized share of AI productivity-related revenues,” he said, and added that continued investment might also be driven by the belief that “continued investment in compute capacity will drive improvement in model performance and potential development of AGI, an occurrence that could drive very outsized profits.”

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