Navigating the AI Stock Market: Caution Over Hype
Written on
Chapter 1: The AI Boom and Its Implications
The surge in artificial intelligence has dominated discussions in 2023, particularly with generative AI tools like ChatGPT revolutionizing various sectors. This has had a profound impact on stock markets, notably with companies such as Nvidia (NVDA), Microsoft (MSFT), and Alphabet (GOOGL) spearheading gains as the U.S. market rebounds to levels reminiscent of 2021.
Undoubtedly, AI is set to transform our world. As the technology matures, it will not only displace numerous jobs but also redefine our lifestyles. For instance, ChatGPT has become a go-to resource for those needing assistance with writing tasks, while advancements in generative image AI have also been remarkable, leading to the creation of AI capable of coding itself.
However, despite these advancements, investors must tread carefully. While companies adept at leveraging AI are likely to thrive, the excitement surrounding this technology has already been incorporated into stock valuations. Shares of NVDA are now reaching all-time highs and are teetering on the edge of being overvalued.
If you're contemplating investing in AI stocks, this may not be the optimal moment. Here’s why:
Section 1.1: The Risks of Overvaluation
Numerous analyses, such as a piece from Seeking Alpha, indicate that NVDA is significantly overvalued using various valuation metrics, even under optimistic growth expectations of over 10% annually for the next decade. This scenario isn’t exclusive to NVDA; many other prominent AI stocks are also facing similar valuation issues.
While valuation techniques may not always predict precise stock prices, they serve as valuable indicators to assess whether a stock is a worthy investment. For example, as Rob Barnett states, “To validate its current share price, NVDA’s sales growth must compound at least 50%, and the adjusted operating margin should consistently hit 42.5%.”
Although it’s conceivable for NVDA to achieve 50% annual growth, how realistic is that? Or perhaps a more pressing question: can a relatively mature entity like NVDA sustain growth rates exceeding 10% over several years?
When investing in stocks, evaluating your margin of safety is crucial. The more conditions that must be met for an investment to yield the desired returns, the riskier and less appealing it becomes. Right now, AI investments are particularly precarious, as bullish sentiment has inflated numerous AI stocks, necessitating many favorable outcomes for a satisfactory return.
And how confident are you that every variable will align perfectly?
Section 1.2: Economic Conditions and Their Impact
If a robust economy were bolstering the AI surge, I would feel more optimistic. However, the current rally in AI stocks is occurring amidst an unstable economic landscape. Governments globally are increasing interest rates to combat rising inflation, coupled with a banking crisis that surfaced earlier this year. Additionally, ongoing conflicts in Europe and trade tensions between the U.S. and China regarding AI chip manufacturing add layers of complexity.
Several elements could hinder AI’s growth, yet the sector continues to flourish. It simply doesn’t add up.
Chapter 2: The Uncertain Value of AI
The paradox of the current AI boom is that no company has yet fully realized the financial benefits of AI on their bottom line. This scenario echoes the solar energy excitement of 2008 and the electric vehicle enthusiasm at the close of 2020. There was immense anticipation regarding how these technologies would transform the world, but the actual impact was less significant than expected.
What were the outcomes of those earlier booms? Society learned that it wasn’t prepared, and the anticipated transformations didn’t materialize as prominently as envisioned.
For instance, the Invesco Solar ETF (TAN) — which tracks solar stocks — has yet to recover to its previous high of $291.
Many electric vehicle stocks, with exceptions like Tesla (TSLA), have significantly declined from their peak values. Rivian Automotive (RIVN) has plummeted 79%, NIO is down almost 79%, and Lucid Group (LCID) has seen an 86% drop, among others.
Both solar energy and electric vehicles, like AI, are technologies that are expected to be long-lasting, yet their initial hype was disproportionate.
If I were to offer guidance to investors, I would suggest monitoring AI developments and allowing the technology to mature. AI is destined to reshape the world, but it’s premature to determine whether AI companies will generate profits commensurate with overly optimistic projections. It’s advisable to allow the market to unfold and witness the outcomes.
This video titled "Missed Out on Nvidia Stock? Buy This Spectacular Artificial Intelligence (AI) Stock Instead" dives into alternative investment opportunities in the AI sector, providing insights for those hesitant about the current market.
The second video, "Nvidia Stock Debate: AI is Overvalued," explores the ongoing discussion surrounding Nvidia's stock performance and the valuation of AI stocks.
Financial Disclaimer: The views expressed in this article are solely those of the author. This commentary is intended for general informational purposes and does not provide financial, investment, tax, legal, or accounting advice. It does not constitute an offer or solicitation to buy or sell any referenced securities. Individual circumstances and current events are vital for sound investment planning; consult with a financial advisor before acting on any information in this article. The information has been sourced from reliable channels and is believed to be accurate at publication, but its completeness and accuracy are not guaranteed. Investing in various assets carries risks, and values can fluctuate significantly, with past performance not indicative of future results.
Affiliate Link Disclosure: Some links in this article may be affiliate links. If a product or service is purchased through one of these links, I may receive compensation at no additional cost to you.
Subscribe to DDIntel Here.
DDIntel highlights key insights from our main site and our popular DDI Medium publication. Explore more insightful content from our community.
Register on AItoolverse (alpha) to receive 50 DDINs.
Follow us on LinkedIn, Twitter, YouTube, and Facebook.