3 AI Stocks in the Danger Zone: Overvalued and Best to Avoid

Published Date: 11/07/2024

Artificial intelligence (AI) has been the hottest sector in the stock market, but some AI stocks have become overvalued and diverge from their fundamentals. Here are three risky AI stocks flashing danger signs.

Artificial intelligence (AI) has taken the stock market by storm since OpenAI released ChatGPT in November 2022. The AI hardware sector has exploded in value, with every major tech company scrambling to buy high-powered GPUs. However, not all AI stocks are created equal, and some have become overvalued and diverge from their fundamentals.

Many AI stocks have rallied for over a year, making it hard to justify chasing them at their current values. Here are three AI stocks flashing danger signs and should be avoided at their current multiples.

Intel (INTC) was once the king of the chip industry, but a drop in PC demand and being replaced as the chip provider for Apple's Macbook computers sent Intel into a downward spiral. Despite receiving $8.5 billion in funding to advance its AI chip technology, Intel continues to lose ground in its core CPU business. Chip-rivals AMD and Arm Holdings are eating away at Intel's market share with superior performance and speed.

Nvidia (NVDA) has been at the forefront of the AI revolution, but its recent 10-for-one stock split has made shares more accessible to retail investors. Nvidia faces the threat of homegrown GPUs from companies like Meta Platforms and Amazon and cheaper domestic offerings in China. With shares trading at 40x sales, any decline in revenue growth will result in the stock becoming increasingly overvalued.

Tesla (TSLA) may not be the first company that comes to mind when thinking of AI, but its long-term potential revolves around AI-based initiatives like their Robotaxi and Optimus robots. However, most of these initiatives are a long way off from being a reality and some may never even come to fruition. Tesla's stock now trades at a sky-high valuation, making it an automaker more than an AI leader.

   OpenAI is an artificial intelligence research organization that aims to develop and promote friendly AI that benefits society as a whole. Bloomberg Intelligence is a leading provider of financial data and analytics. iShares Semiconductor ETF is an exchange-traded fund that tracks the semiconductor industry. Apple is a multinational technology company that designs, manufactures, and markets consumer electronics. AMD is a multinational semiconductor company that develops computer processors and related technologies. Arm Holdings is a multinational semiconductor and software design company that develops and licenses processor architectures. Meta Platforms is a multinational technology company that operates several businesses, including Facebook and Instagram. Amazon is a multinational e-commerce company that provides online shopping and digital content.

The AI hardware sector has exploded in value since OpenAI released ChatGPT in November 2022. The iShares Semiconductor ETF has gained more than 54% over the past year, making it one of the top-performing ETFs in the market.

FAQS:

"Q: What is Artificial Intelligence?

A: Artificial intelligence (AI) is a technology that enables machines to perform tasks that typically require human intelligence, such as learning, problem-solving, and decision-making.

Q: What is OpenAI?

A: OpenAI is an artificial intelligence research organization that aims to develop and promote friendly AI that benefits society as a whole.

Q: Why are some AI stocks overvalued?

A: Some AI stocks have rallied for over a year, making it hard to justify chasing them at their current values. These stocks may be overvalued due to hype and speculation, rather than their underlying fundamentals.

Q: What is the iShares Semiconductor ETF?

A: The iShares Semiconductor ETF is an exchange-traded fund that tracks the semiconductor industry, providing investors with exposure to companies that develop and manufacture semiconductors and related technologies.

Q: Why should I avoid these AI stocks?

A: These AI stocks are flashing danger signs due to their high valuations, declining growth, and increasing competition in the market. Avoiding these stocks can help investors mitigate potential losses and find better opportunities in the market.

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