These 10 AI Stocks Are Grossly Overvalued

Photo by Steve Johnson on Unsplash

An Introduction

The Nasdaq Composite Index is trading at 28 times forward earnings, making it one of the most expensive markets in history - and enthusiasm over AI is driving much of this. While it's very exciting, in my humble opinion we are in the early stages of a market rotation, just like we witnessed in the dot.com era of the late 1990s when the Nasdaq lost 78%. 

AI Stocks With the Highest Forward Price-to-Earnings Ratios

I opened this article inferring that the Nasdaq was overvalued so let's take a look at the 10 stocks in the 39 that I follow (see here) that have the highest current forward price-to-earnings ratios. Keep in mind that the forward P/E ratio is a key valuation metric reflecting how much investors are willing to pay today for expected earnings over the next 12 months. A higher ratio indicates optimism about future growth but overvaluation if earnings don’t materialize. I also provide the stocks' performances month- and year-to-date in a new AI Stocks With the Highest Fwd P/E Ratios Portfolio which I will track on a weekly basis going forward.  

1.  Intel Corporation (INTC): 201.7 current forward price-to-earnings ratio
   • UP 25.3% MTD; UP 23.7% YTD
2. Tesla (TSLA): 201.5
   • UP 10.3% MTD; DOWN 15.8% YTD
3. Cadence Design Systems (CDNS): 50.5
   • DOWN 4.1% MTD; UP 16.4% YTD
4. Monolithic Power Systems (MPWR): 48.2
   • UP 18.7% MTD; UP 45.1% YTD
5. Microchip Technology (MCHP): 47.8
   • UP 2.3% MTD; UP 20.6% YTD
6. STMicroelectronics (STM): 47.5
   • UP 8.2% MTD; UP x% YTD
7. Broadcom (AVGO): 44.1
   • No Change MTD; UP 26.8% YTD
8. Advanced Micro Devices (AMD): 43.0
   • DOWN 4.8% MTD; UP 28.8% YTD
9. Synopsys (SNPS): 41.6
   • DOWN 4.3% MTD; UP 25.0% YTD
10. Nvidia (NVDA): 40.9
    • No Change MTD; UP 32.6% YTD

On average, the Portfolio is UP 4.4% MTD and UP 22.4% YTD. 

Conclusion

The current average forward P/E ratio of the Nasdaq Composite Index is 27.9, which is down from the 3-year average of 34.2. In addition, while the average increase in the 10 stocks highlighted above are slowing, they are still up (4.4%) compared to the Global X Artificial Intelligence & Technology ETF (AIQ) of 93 AI-focused stocks, which was down 0.6% during the same period. Both metrics, however, suggest a valuation of AI-focused technology stocks is on the verge of resetting after years of tech-driven exuberance with a market rotation into other sectors on the horizon. 

 

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