Is there a looming AI bubble?
Understanding the valuation of AI stocks is crucial for investors looking to capitalize on the burgeoning AI market. AI-related stocks have experienced a surge in interest and value, driven by the continuous innovations and applications of AI across various industries. Major players in the AI industry, such as OpenAI and NVIDIA, have significantly impacted the AI investment landscape, contributing to the industry’s substantial growth and investor enthusiasm. Predictions for the AI market in 2023 and 2024 indicate further expansion and opportunities for investors seeking exposure to AI technologies and companies.
Evaluating the potential burst of the AI bubble is a topic of concern for many investors and industry analysts. The comparison to the dot-com bubble raises questions about the sustainability of the current exuberance in the AI market. The enthusiasm around AI, coupled with the exponential rise in AI stocks, has led to speculation about the existence of an AI bubble and its possible repercussions on the investment landscape.
Compared to the dot.com bubble, valuations are much lower at around the mid-20s to 30 range versus an average of 60 times earning during the dot.com. Secondly, some of the key companies in the current AI Boom are established players with big cash resources. Our view is that crypto bubble has lost steam and some of that speculative money and attention has now flowed towards AI themes.
It is useful to seperate companies in terms of hardware, data or application focused in considering investments in this space. For hardware, NVIDIA, AMD and INTC (longer-term) are key players. Along with equipment makers such as ASLM, the dutch coompany. Data providers include Microsoft, Databricks, MongoDB etc. Finally, application companies are a work in progress since it is really about which companies implement Open AI, ChatGPT and other models better
Additionally, the potential for IPOs and investment opportunities in AI and related sectors presents avenues for both established companies and startups to access capital and expand their operations.
Our view is that the AI Boom has more room to run in 2024. However, this will not be smooth and key earnings reports from players will determine the actual path. For example, ST Microelectronics (STM) disappointed the market yesterday. But ASML provided extremely positive guidance for lithography machines to make advanced chips.
NVIDIA stock has had a strong start to 2024. However, technical indicators seem to indicate that it may be overbought and might have a pullback. We think this might not happen before the earnings call in late February. Many analyst had a price target of about $600 plus. The RSI indicator is above 70 and currently stands at 74 suggesting overbought conditions. Please see the chart of NVDA below:
How is AI bubble impacting the stock market and broader financial landscape?
Implications for tech stocks and NASDAQ due to the AI bubble are worth considering for investors with exposure to the technology sector. Major players like NVIDIA have played a pivotal role in shaping the AI financial landscape, positioning themselves as beneficiaries of the AI frenzy and driving advancements in compute and AI technologies.
Assessing generative AI and its impact on AI investments is crucial as the technology evolves. Anticipated market trends and developments in 2024 and beyond will shape the investment landscape, requiring investors to stay abreast of the latest advancements in AI models and technologies. The significance of compute and AI advancements in stock market valuations cannot be overlooked, raising questions about the sustainability of current AI valuations and the potential implications for the broader stock market.