3 AI Stock Valuations That Can’t Keep Up With Reality
For many investors, recognizing that a stock is overvalued can be a difficult task when the broader media is lauding its accomplishments. Yet a healthy bump in earnings or revenue can often translate into an overvaluation in a short amount of time. This has been especially common in the artificial intelligence industry, which has led to the occurrence of several overvalued AI stocks.
These stocks, whether developers or contributors of AI technology, have seen unsustainable gains as a result of bullish sentiment from both retail investors and institutions betting on the technology’s future impacts on the tech industry.
While there may be growth coming to the sector in the future, there’s a significant chance the current state of AI technology does not justify the high prices of stocks directly contributing to the sector. Thus, investors may want to avoid buying into these three overvalued AI stocks until a more significant correction occurs.
Nvidia (NVDA)
Though Nvidia (NASDAQ:NVDA) has seen some amazing growth in the last 12 months alone, the 146% returns that have drawn so many to the stock might not be sustainable. Now, since its peak just two months ago, the company has lost nearly $1 trillion in market capitalization as investors slowly begin to sell off and take profits on the stock’s historic run.
Yet, even with this gentle downtrend in the month following its peak, Nivida is still overvalued at $109 a share. The first clue of this is its 63.91x price-to-earnings ratio, suggesting that the share value may not be justified by the earnings, no matter how consistently they’ve exceeded analyst expectations.
The primary reason for this is that Nvidia’s sales, though impressive, have a limiting factor to their growth, which is both how quickly Nvidia’s suppliers can produce the graphics processing units (GPUs) it sells and the demand for those same GPUs. Right now, the numbers are on its side, but this can change swiftly.
Advanced Micro Devices (AMD)
While its growth may not be as meteoric as Nvidia’s, Advanced Micro Devices (NASDAQ:AMD) has seen its price-to-earnings ratio balloon in recent months to an unsustainable 159x. Though that’s not the worst its P/E ratio has been in the last 12 months, it’s still a sign that the company’s current value could be a product of speculation more than revenues.
Moreover, although its new data center GPUs stand to potentially rival Nvidia’s in smaller markets, until the earnings can catch up to the current valuation, it’s at risk of a significant correction. This is particularly true in case the broader stock market crashes, which would result in investors selling off overleveraged positions like AMD’s.
As such, investors need to be careful of overvalued AI stocks like AMD, especially when the correction downturn has already been in a gradual stage for the last month.
CrowdStrike (CRWD)
While not a direct contributor to the AI industry, CrowdStrike (NASDAQ:CRWD) saw its share value spike as it announced its Falcon AI-native protection platform. This product, while still an early representation of the potential of AI, has been a significant driver of growth for the company’s stock as it markets itself as a universal provider of cybersecurity services.
Moreover, much of the speculation around the importance of CrowdStrike’s security platforms has increased as analysts predict how AI will empower hackers to launch more devastating attacks through AI applications. Beyond this, the company’s recent blunders around a kernel-native operating system update caused millions of Windows machines to crash around the world, suggesting its deployment parameters might not be as perfect as once thought.
All of the attention around its AI prospects and cybersecurity gains has led the stock to balloon in price to a point where its price-to-earnings ratio is a mind-boggling 419x.
On the date of publication, Viktor Zarev did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or
indirectly) any positions in the securities mentioned in this article.
