The artificial-intelligence boom has fueled the stock market over the past few years, and the hype has gone into overdrive in the last 12 to 18 months. Based on all this chatter, there are several AI stocks to watch.
Is investing in AI a good decision? Well, as of late, the prices of many AI-related stocks have skyrocketed, and so have their valuations.
Thus, investors need to watch these valuations carefully for overpriced AI stocks that don’t have the earnings power to match their lofty prices. When irrational exuberance kicks in, stock prices will often plummet or correct eventually.
Here are three AI stock listings that look overvalued right now.
1. CrowdStrike
CrowdStrike (NASDAQ:CRWD) is a cloud-based cybersecurity company that uses AI to detect malware and intrusions across networks. It has been generating huge revenue gains, with revenue up 33% year over year in the most recent quarter that ended on April 30.
Over the past four quarters, CrowdStrike has been generating net income and no longer posting net losses, which is a good sign in its development and maturity. However, the company’s stock price has gone through the roof, soaring 52% already year to date and 149% over the past 12 months.
It is understandable as CrowdStrike is one of the leading players in the fast-growing cybersecurity industry, but its valuation has also gone through the roof. CrowdStrike now has a ridiculously high price-to-earnings ratio of 696 and a forward P/E of 93.
The exceedingly high trailing P/E is due to the fact that the company has just started to become profitable. However, the forward P/E, which is based on future earnings, is still very high.
Thus, investors should be cautious, as that high valuation will be hard to sustain.
2. AMD
Advanced Micro Devices (NASDAQ:AMD) is a semiconductor company that makes graphics processing units (GPU) for computing and gaming. AMD is also the chief rival of NVIDIA, although it was a little late to the game in developing AI chips to handle more complex tasks.
Nonetheless, the company rolled out some new high-performance AI chips last year, and they have fueled its sharp rise. AMD still trails NVIDIA by a wide margin, but as the second-biggest player in this burgeoning space, it has gained market share.
Last year, AMD’s stock price soared 127%, and this year, it has climbed about 15% YTD. However, the company’s revenue growth slowed in the most recent quarter that ended March 31, rising just 2% year over year.
AMD’s net income jumped to $123 million from a $139 million net loss in the same quarter a year ago, although it is down from $667 million in the December 2023 quarter.
With AMD’s revenue expected to climb 6% year over year in the June quarter, it could be hard to sustain the current P/E ratio of 232. That is astronomically high, but its forward P/E is a little more reasonable at 46.
As with CrowdStrike, investors should be watching that P/E ratio.
3. NVIDIA
NVIDIA (NASDAQ:NVDA) is a great company that is the far-and-away leader in its space as a maker of AI chips for data centers and computers. However, things are getting a little too hot.
NVIDIA has been the hottest stock on the market for the past two years, skyrocketing 239% in 2023 and another 149% already this year. NVIDIA shares even surged again after last week’s 10-for-one stock split.
The area in which the company dominates has only just started to grow, so while NVIDIA could lose some market share, it should also continue to ride this AI revolution in computing.
NVIDIA has massive earnings power, but still, its P/E ratio is at around 70 with a forward P/E of 46. It is not as overpriced as the other two stocks on this list and has considerably more earnings power. However, with this high price, it could see a correction.
I actually think all three of these are excellent long-term holdings, but new investors should be wary of these high valuations and perhaps look for opportunities to buy lower.
