The artificial intelligence (AI) boom has caught the eye of investors recently. The emergence of ChatGPT late last year has demonstrated just how AI could revolutionise the world and has many looking for ways to leverage this megatrend to grow their wealth in the share market.
The good news is that there are a couple of ASX tech shares that look set to benefit from the increasing demand for generative AI.
Which ASX tech shares could benefit from ChatGPT?
Given that ChatGPT and other generative AI platforms are cloud-based, they need somewhere from which they can work their magic – data centres.
This bodes well for Macquarie Technology Group Ltd (ASX: MAQ) and NextDC Ltd (ASX: NXT), which operate some of Australia's highest quality centres.
And while these platforms are likely to remain US-based for the time being, analysts at Goldman Sachs believe that eventually there will come a time when they need to be closer to their users. This will require space in data centres across the world, including Australia.
In light of this, Goldman Sachs believes that Macquarie Telecom and NextDC would be great options for investors looking to gain exposure to the AI boom. It explains:
We believe the DC [data centre] industry will benefit from a 'third wave of demand', with generative AI requiring 5-10x more compute vs. traditional search. However, we note the (1) size of the opportunity; and (2) mix of beneficiaries (hyperscale/co-lo), are ongoing debates.
In the near term, we believe AUS co-location facilities could benefit by hosting early local AI deployments by enterprises, with large foundational models such as ChatGPT appearing to run in the US/Europe facilities currently. However, in the medium term, we believe the need for (1) lower-latency applications and (2) for ecosystem connectivity, evident in existing AI players (such as harrison.ai) focusing on on-ramps, will drive compute into co-location facilities such as NXT/MAQ/SPK (albeit with adapted building designs for new builds/retrofits).
Big returns predicted
Goldman currently has a buy rating and $14.96 price target on NextDC shares, suggesting potential upside of almost 18%. Whereas it has a conviction buy rating and $75.30 price target on Macquarie Telecom's shares, implying potential upside of 26% for investors. The broker concludes:
For NXT, we reiterate our above consensus FY25/26E contracted MW wins which drives our EBITDA estimates +2% vs. cons., and stay Buy given NXT is trading at a growth-adjusted discount vs. peers. We make no changes to our MAQ estimates (reiterate Buy (on CL)), noting it has flown under the radar since NVDA, and is currently at a significant SOTP-implied discount to NXT's DC business (we estimate ~40-50% on FY24 EV/EBITDA) despite its strong returns and sticky recurring revenue.
