Since the beginning of last year, stocks related to artificial intelligence (AI) have risen significantly. As a result, investors who bought these companies during the 2022 bear market undoubtedly made huge profits.
However, some of these stocks have seen rising valuations. Unfortunately, these multiples make it risky to buy these stocks now, even though they have significant long-term growth potential.
Regarding these three stocks, investors may want to wait and not buy in current market conditions.
1. Arm Holdings
Semiconductor investors undoubtedly welcomed the arrival of UK-based semiconductors. arm holdings (arm -4.00%). Arm creates architectures for energy-efficient, low-cost, high-performance CPUs. Its chip design is particularly popular in the data center, automotive, and smartphone sectors. The company licenses its technology to companies such as: Nvidia and Qualcommhas become an important part of the world's technology infrastructure.
Interestingly, after introducing the stock at $51 per share in September, the stock quickly slumped. But in November, it started to gain momentum following strong earnings reports and growth in the sector.
After the company released its latest earnings report on February 7, investors began dramatically increasing the company's stock price. Arm's stock price rose 85% in just three trading sessions.
Since this stock has new earnings, its P/E ratio may not fully reflect its value. However, with a forward P/E ratio of nearly 110 and a price-to-sales (P/S) ratio of 45, there is little margin for error in that valuation. This also means that at an all-time low of $46.50 per share, investors still paid a hefty premium for the stock.
Indeed, given Arm's role in the industry, the company is likely to deliver substantial returns in the long run. But investors would have likely earned higher returns if they had held out for a bear market and, by extension, a decline in stock prices.
2. Cloudflare
cloudflare (Net -2.67%) Leverage the cloud to provide a faster, more secure experience for your users. The company operates more than 300 data centers around the world, covering approximately one-third of the world's unique Internet networks.
Because nearly all users are located near at least one data center, the company can support edge computing networks in most locations around the world. As a result, our customer base has increased by 35% over last year. Additionally, the net revenue retention rate was 115%. This means that a long-term customer has increased his Cloudflare spending by an average of 15% year over year.
As a result of this success, the company's stock price has increased more than 65% over the last year, with about half of that increase occurring after the company announced its fourth quarter 2023 results on February 8th.
Cloudflare's profitability also falls short of generally accepted accounting principles (GAAP), meaning investors will have to rely on the P/S ratio to gauge valuation. A P/S ratio of 25 is far from a record, but a move to a P/S ratio of 100 is unlikely unless the investment environment begins to align with his 2021 bull market.
Investors should also remember that Cloudflare lost over 80% of its value at one point in the 2022 bear market. In fact, we believe the benefits of Cloudflare's network will continue to drive robust customer growth. Still, if investors turn against loss-making companies again, those who buy now could face years of losses.
3. Super microcomputer
super microcomputer (SMCI -19.99%) This is one of the most attractive growth stories in the current bull market. The company experienced the most significant growth in its 30-year history, as the partnership with Nvidia dramatically increased demand for servers.
Additionally, the company's past and current efforts have secured 6 million square feet of manufacturing space and a trading footprint spanning 100 countries. This allows the company to sell and distribute its technology almost anywhere its clients request it.
Its success resulted in an annual profit of just under 750%. Furthermore, the stock's growing popularity has seen it grow by over 165% since the beginning of 2024.
Admittedly, on the surface, valuations may not seem as high as some stocks. The P/E ratio is over 60 times, and sales are approximately 5 times higher.
Nevertheless, it was only about a year ago that the company was trading at a P/S ratio of 1, increasing the likelihood of a decline in stock prices since equipment manufacturers often do not command high valuation premiums. There is.
Supermicro is a stock that tech investors will want to own as the need for AI hardware increases. Nevertheless, with last year's big rally, investors may want to wait for a big drop before starting to add to the stock.
