Excitement surrounding artificial intelligence (AI) has fueled the market's rise over the past year. Businesses are actively turning to AI-powered technologies to improve their operations and make them more efficient and effective.And for many companies, e.g. Nvidia (NVDA 2.45%)the payoff is already occurring, with revenue and profits surging in recent quarters.
But there's definitely a lot of hype around AI, and many stocks are priced at prohibitively high valuations. And popular hedge fund manager Ken Griffin believes investors may be getting ahead of themselves.
results in a higher likelihood of incremental profit
In a recent interview with CNBC, Griffin poured cold water on the recent market hype surrounding AI. “It's not clear to me whether we're going to get the productivity gains from AI that the market broadly expects,” he said.
While he recognizes the potential for AI to replace entry-level jobs (such as call center jobs) and the incremental benefits, he is far more skeptical that AI will replace fund managers. It's on point. And while large language models are great for “regurgitating what's available on the World Wide Web,” I don't think their usefulness goes much beyond that.
This, after all, is at the heart of the recent AI debate, and what is driving the valuation to such heights. At the inflated multiples that many AI stocks are worth, you have to believe that AI is indeed innovative and will begin to take over not just entry-level jobs, but more advanced jobs. But if that doesn't happen, the investment thesis behind many stock price spikes could be undermined.
Are AI stocks overheated?
Three hot stocks that have doubled in the past six months and are banking on a strong future in the AI space include Nvidia; arm holdingsand Soundhound AI. Amid this growth, company valuations have increased significantly. Here's how these three stocks stack up in terms of sales.
P/S ratio data by YCharts
Investors are paying a lot of money for these stocks, essentially assuming high levels of growth for years to come. And if that growth doesn't pan out, the risk is that these stocks, with such high valuations, could be vulnerable to being sold off.
A recent survey conducted by software company Retool late last year found that even technology employees are not convinced of AI's effectiveness. More than half of the 1,500 tech workers surveyed believe AI is “overrated,” and there is enough evidence to suggest that AI will be as transformative as people expect. I think there is no evidence.
While ChatGPT has become a great tool for drafting emails and writing essays, ChatGPT and other chatbots have also been found to be unreliable, sometimes showing “hallucinations” or fabricating facts. Masu. While there is great promise for AI, the risk is that investors may get too excited about these next-generation technologies too soon.
Is now the time to exit AI stocks?
If you're currently investing in Nvidia or other high-priced tech stocks, you're probably doing so out of excitement about future growth prospects, especially when it comes to AI. And while its prospects may be promising, it's also important to consider what happens if those expectations fall short, and whether you want to continue holding the stock even if AI-related growth starts to slow.
Being aware of the assumptions underlying an investment can help you identify the risks associated with your investment. In the case of Nvidia, its business isn't entirely reliant on AI, but it could still be a good tech stock to own for the long term. But for other stocks that pay a high premium and you're investing in just because they have the potential to do better because of AI, it may be a safer option to think twice about those investments.
David Jagielski has no position in any stocks mentioned. The Motley Fool has a position in and recommends Nvidia. The Motley Fool has a disclosure policy.
