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AI stocks have been in the spotlight in recent weeks, with some investors and analysts expressing concerns about their high valuations, and drawing parallels to the early 2000s dotcom bubble.

Last week, a major Wall Street analyst at Goldman Sachs weighed in with his own concerns.

“Our discussions with investors and recent equity performance reveal limited appetite for companies with potential AI-enabled revenues as investors grapple with whether AI is a threat or opportunity for many companies,” Goldman Sachs analyst Ryan Hammond wrote in a research note last Friday, according to Yahoo Finance.

AI stocks have sputtered in recent weeks, with the Morningstar Global Artificial Intelligence Select Index down about 1% over the past month. But performance among AI stocks has varied wildly.

Nvidia (Nasdaq: NVDA), for example, is down 7% over the past month, while Palantir (Nasdaq: PLTR) is down 16%. The major concern among investors is the soaring valuations of these AI juggernauts. Nvidia is trading at 47 times earnings, while Palantir has a ridiculously high P/E ratio of 501. Other AI stocks, like CrowdStrike (Nasdaq: CRWD) with a P/E ratio of 401, are also overvalued. Investors are worried that these high valuations are not sustainable.

Then there are those AI stocks without any significant revenue or earnings that are soaring just because they are riding the AI wave. It is for these reasons that investors are becoming concerned.

“Investors increasingly ask us whether current US equity prices are reflective of overly optimistic investor expectations,” Hammond wrote.

Winners and losers in AI’s Phase 3

Hammond also sounded a warning about the next phase of AI – which he called Phase 3.

While we expect the AI trade will eventually transition to Phase 3, investors will likely require evidence of a tangible impact on near-term earnings to embrace these stocks. Unlike Phase 2, there will likely be winners and losers within Phase 3,” Hammond wrote, per Yahoo Finance.

In addition, the Goldman Sachs analyst noted that capital expenditures in AI investments may have peaked, at least for this cycle, which could impact upcoming earnings.

But while valuations are a concern, Hammond disagrees with some that say AI stocks are in a bigger bubble than dotcom stocks were in the early 2000s.  

“Implied market pricing of long-term S&P 500 earnings growth and the valuations of the largest TMT [tech, media, telecom] stocks are both modestly above their respective historical averages but remain well below the levels reached in the Tech Bubble and 2021,” Hammond stated, per Yahoo.

Ultimately, investors may have to be more discerning as this next phase of AI rolls in, looking at the fundamentals of individual AI stocks rather than just investing in anything AI-related.

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