AI stocks to sell are at risk if the AI bubble continues to inflate beyond sustainable levels
of S&P 500 It’s up more than 50% from its 2022 lows. The biggest reason for the stock market’s resilience is the craze for AI-related stocks. Many believe that excitement around artificial intelligence and its potential as a revolutionary technology has caused AI-related stocks to soar, creating a bubble reminiscent of the dot-com bubble at the turn of the century. That’s why many are wondering if it’s time to sell.
Valuations and investor enthusiasm aren’t as high as they were during the dot-com collapse. But investors continue to wonder if the similarities are too great to ignore. Each bubble inflated was sparked by the introduction of a world-changing technology. Investors, eager to secure early profits, are rushing to get their share of the gains. When expectations don’t match reality, it can be a recipe for trouble.
The good news is that key metrics like 12-month forward price-to-earnings ratios are significantly lower now than they were at the dot-com peak. The bad news is that every bubble is different and there may be unforeseen factors at play that no one can predict until it’s too late.
Nvidia (NVDA)
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NVIDIA (Nasdaq:NVDA) stock is the most obvious choice among AI stocks to sell before the bubble bursts, and one of the most obvious reasons to believe so lies in the similarities between NVIDIA and the dot-com champions. Cisco (Nasdaq:Central Intelligence Agency).
Cisco’s stock price rose about 4,500% in the five years leading up to its peak in 2000. Nvidia’s stock price has risen about 4,300% in the past five years. Only time will tell if this is a coincidence.
Following its latest earnings report in late May, it’s easy to see why investors continue to bet bullishly on Nvidia. Revenue surged more than 250% year over year. Sales hit $26 billion, with $22.6 billion of that coming from data center sales. All of this continues to suggest that Nvidia remains one of the best investments in AI, which is widely viewed as the gold-like commodity of the digital age.
But questions remain about Nvidia and how much the company truly sees the opportunity it currently has. The truth is, over the past five years, Nvidia’s asset growth has significantly outpaced its revenue growth. This is a real sign that Nvidia’s big bet on AI hasn’t yet paid off as much as some think. If you need a reason to sell, take this as a signal.
Broadcom (AVGO)
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A quick look at the stock chart Broadcom (Nasdaq:AVGO) shows that there are real concerns about the current AI bubble.
The stock price surged above $1,800 by mid-June, only to quickly drop back below $1,600 a week later. The surge and subsequent decline was mirrored across much of the AI sector and signaled widespread doubts among AI investors. The stock has since recovered, but the volatility is a clear sign that investors recognize Broadcom may be in the midst of an AI bubble.
While Broadcom isn’t a pure AI stock, the company mentioned “AI” 51 times in its most recent earnings report, so AVGO could benefit from the halo effect surrounding all things AI.
There are signs that Broadcom feels internally that its stock price is not going to rise much further. The company has chosen to implement a 10-for-1 stock split. Such stock splits do not change anything about the fundamentals of the company and create a stock price increase primarily due to a psychological effect. Management’s decision to implement a stock split should be a cue for investors to sell.
Our fundamentals-based screening tools suggest that Broadcom is currently significantly overvalued. The company is clearly benefiting from the AI halo effect and therefore at risk.
Apple (AAPL)
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apple (Nasdaq:AAPL) shares bounced back following the Worldwide Developers Conference (WWDC24). AI is one of the factors that has helped Apple’s stock price recover, suggesting that the company is heavily influenced by the hype around the AI bubble.
Apple announced two things during a short conference on June 10th. The big upgrades include iOS 18 and the introduction of Apple Intelligence. The company’s huge user base is poised to receive upgrades for years to come. This is expected to boost the stock price. But it begs the question: how much of the recent stock price surge is due to AI hype?
Of course, that’s a question no one can answer at this point, but investors remain somewhat cautious. Apple’s revenues aren’t as strong as they were a year ago, so while the introduction of iOS 18 and Apple Intelligence is promising, the company is still struggling.
While Apple continues to generate plenty of cash flow to keep shareholders happy, it will be difficult to sustain the stock price at these levels if the company’s AI-generating efforts don’t bear fruit.
AMD
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When the AI bubble bursts, Am (Nasdaq:Am) may not turn out as investors expect.
If AMD’s AI bubble were to burst, it would be largely due to investors’ realization that the company won’t be able to capture a larger percentage of its revenue from Nvidia. The point here is that some analysts see signs of such competitive weakness at price levels between $116 and $132.
Those price levels may be much higher than many expected after the bubble burst, but technical analysts expect them to fall to exactly those levels if AMD fails to grab market share from Nvidia.
AMD shares are up about 14% year to date. The same stock rose from $140 at the start of the new year to over $210 by early March. It is currently trading at $160. AMD is expected to grow revenue by 14% in 2024. If investors judge stock performance relative to sales, there may be little reason to invest in AMD at this point.
Microsoft (MSFT)
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It’s hard to argue with that. Microsoft (Nasdaq:MSFT) is the best stock to sell. It has posted 10x returns over the past decade, and Windows and Office remain strongholds where the company is based.
Despite these obvious strengths, there are concerns that Microsoft is currently overvalued, primarily due to AI. Any investor need only look at the company’s current P/E ratio of 39, which is well above its 10-year median.
How justified is the valuation increase? Is the $30 CoPilot add-on worth it? As my colleague Dana Blankenhorn pointed out, Microsoft doesn’t publish performance figures, so no one really knows.
CEO Satya Nadella was happy to brag about the early adoption of AI earlier this year, but nothing significant has been said since then, which is a troubling sign. Microsoft is well protected by Windows and Office, so it won’t take a hit if the AI bubble bursts. But as questions about the bubble continue to swirl, now might not be a bad time to cash in.
Intel (INTC)
Intel (Nasdaq:International Trade Commission)’s shares fell sharply in 2024. So it probably wouldn’t be too hard to convince readers to avoid the stock going forward.
AI got Intel a lot of hype earlier this year: In February, the company announced the launch of a systems foundry designed for the AI era. That was toward the end of a period when Intel was considered a legitimate competitor to Nvidia.
But when it comes to AI chips, Intel is lagging far behind Nvidia. Intel’s flagship chips are called Gaudi-3. These chips are meant to compete with Nvidia’s upcoming Blackwell chips, which will be released around the same time. The problem is that Intel’s chips aren’t as powerful.
As a result, Intel’s window of opportunity to reap the benefits of AI may already be over. Moreover, Intel’s revenue peaked in 2021 and is not expected to recover to those levels until 2028.
Taiwan Semiconductor Manufacturing (TSM)
Taiwan Semiconductor Manufacturing (New York Stock Exchange:TSMC) is one of the best investments, but also one of the most vulnerable to the AI bubble.
The AI opportunity is so good that it is one of the best investments right now. Taiwan Semiconductor Manufacturing serves as the world’s foundry and produces the world’s most advanced chips, including chips for AI applications. Its excellent positioning has led to the company’s stock price rising by nearly 80% in 2024.
The flip side of this phenomenal growth is clear: TSM is also highly exposed to the inherent dangers of an AI bubble. Because TSM actually provides the chips that Nvidia, AMD, and many other companies sell, it stands to gain significantly if things go wrong.
TSM’s P/E ratio is currently at an all-time high, more than double its median over the past decade. This is a bit worrying given that the company has been the world’s foundry during this period. The hype around AI is the obvious reason it has become so valuable in 2024. As questions continue to swirl about AI’s true value, TSM will likely remain under bubble watch.
As of the publication date of this article, Alex Sirois did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are solely those of the author, which is subject to InvestorPlace.com’s copyright. Publication Guidelines.
On the date of publication, the editor in charge did not hold (either directly or indirectly) any positions in the securities mentioned in this article.
