Artificial intelligence has become a hot topic since the launch of OpenAI’s ChatGPT, and investors were quick to jump on the AI bandwagon. As a result, many AI-related stocks have become ridiculously overvalued due to the recent hype, although there could be a few options for bargain-hunting investors.
Artificial intelligence has been on investors’ radar for the last several years, but the launch of ChatGPT has significantly boosted interest in AI over the last six months or so. AI represents a computer’s ability to do the types of critical thinking functions at levels that have historically been the exclusive purview of humans.
By some standards, tech gurus may see AI as the gold standard in future computing, and investors are starting to get that vision too. As a result, the market has boosted the shares of any company that even claims to have something to do with artificial intelligence.
Beware the euphoria in the AI space
Unfortunately, this all-encompassing gobbling up of shares in every company that even uses the words “artificial intelligence” or “AI” is merely the first stage of the hype cycle, a typical pattern of euphoria, followed by a period of displeasure and eventually, maturity. Of course, it’s extremely challenging to determine stock valuations during periods of euphoria because investors will buy almost any company that even claims to offer AI products or services.
It’s essentially a knee-jerk reaction in response to FOMO, a fear of missing out. As a result, stocks in the affected sector end up with valuations they have no right to have. In most cases, the companies themselves are unprofitable, making it even more difficult to attach valuations because you’re attempting to estimate their future.
However, a little bit of due diligence before making any purchases can go a long way toward weeding out companies with no plans to actually build anything AI-related that are just trying to capitalize on the hype.
These four AI stocks may be undervalued
1. Palantir Technologies
This company is unprofitable, as are most of the companies on this list, but it’s much further along on its path. Palantir enjoys robust revenue growth that approached $2 billion in fiscal 2022, and its net losses are narrowing year after year, falling to $255.5 million last year. Despite these positive trends, the company’s market cap is a “mere” (compared to the others on this list) $34 billion.
Most people don’t think of this software giant as an AI play, but it stands to benefit greatly from its majority ownership of OpenAI, the developer of ChatGPT. In January, Microsoft invested $10 billion in OpenAI, supposedly in exchange for the rights to 75% of its profits until it earns back the original $10 billion and the other $3 billion it had already invested in the company, plus a 49% stake. At a P/E of 36.6, Microsoft looks far more attractively valued than those on the other side of this list. Even if that rumor isn’t entirely accurate, there’s little doubt that Microsoft will benefit from the OpenAI investment.
3. Marvell Technology
This chipmaker lost $163.5 million on $6 billion in revenue in fiscal 2023, but most analysts agree that profitability is close. Marvell projected that its AI revenue will double for the coming year, so its stock is up 72% year to date. However, it’s still trading at a price-to-sales ratio of 9.4, which is far lower than any of the companies on the other side of this list.
This chipmaker swung to a loss for the last 12 months, which has restrained its stock price but created a buying opportunity. However, at a P/S of only 2.5, Intel simply looks like a bargain because with $63 billion in revenue in 2022, it’s not going anywhere anytime soon. While Intel’s AI chip won’t land on the market until 2025, it sounds like that chip will outperform AMD’s AI chips.
These four AI stocks may be overvalued
This chipmaker’s stock exploded after management used the phrase “generative AI” in their earnings commentary. Now the latest trillion-dollar company, NVIDIA is now trading at a price-to-earnings multiple of 217.7 times. While it may not be wise to bet against the company, there’s just no telling how much longer this bubble will continue to inflate.
This company has benefited tremendously from having “AI” in its name and its tickers. Despite recording only $266.8 million in revenues for its 2023 fiscal year and racking up net losses of $268.8 million, C3.ai has a market cap of nearly $5 billion. It looks like this could be a bubble stock as well, especially given that it’s nearly tripled year to date and now trading at a P/S of 18.4.
3. Advanced Micro Devices
If NVIDIA looked overvalued, AMD may be considered obscenely valued with its P/E of 523.6, although its market cap remains in the $203 billion range. The company’s stock popped 7% right after it announced a new AI chip to rival NVIDIA, but it was already quite high at the time. AMD shares have now doubled year to date.
At a P/S of 25, Snowflake looks quite expensive compared to the other side of this list. Although the company generated $2.1 billion in revenue for fiscal 2023, It also racked up losses of almost $800 million. Despite that, the company’s stock is up 32% year to date, bringing its market cap to $58.4 billion.
Investing in AI stocks
With AI being such a new area of technology, any investment in this area could be risky because it’s essentially a bet on the future. Of course, companies like AMD and NVIDIA aren’t going anywhere, so the risk with those stocks is buying high with the potential of selling low later. Investors are always advised to do their due diligence before making any investment.
Note: All P/E ratios come from Google Finance, and all P/S ratios come from Tikr. All given ratios are current as of the time of this writing.
About the Author
Pierre Raymond is a 25-year veteran of the Financial Services industry. Driven by his passion for financial technology he has transitioned from being a quantitative stock picker, to an award-winning hedge fund manager, credit risk manager to currently a RISK IT Business Consultant.