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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