Beware the Bubble: Cautionary Analysis on Overheated AI Stocks

The artificial intelligence (AI) market, riding high on record highs and optimism, is now under scrutiny for potential overheating, reminiscent of the dot-com bubble. Analysts are sounding warnings, pointing out overheated AI stocks that may be headed for a correction. Here’s a closer look at three such stocks and the concerns surrounding them:

1. Super Micro Computer (SMCI):

• Current Situation: The AI server manufacturer has witnessed a substantial stock price surge, soaring more than 20 times in the past two years, primarily fueled by the demand for AI servers.
• Concerns: Trading at a P/E ratio of 70.9x, well above the technology sector average, suggests potential overvaluation. The recent announcement of joining the S&P 500 index added momentum but also raised concerns about the sustainability of its growth.
• Analyst View: The article considers SMCI among the overheated AI stocks to sell, citing the possibility of a correction due to its rapid and potentially unsustainable growth.

2. MicroStrategy (MSTR):

• Current Situation: MicroStrategy, known for AI innovation and enterprise analytics, gained attention for being the largest publicly traded institutional holder of Bitcoin. Its stock performance often mirrors the cryptocurrency market.
• Concerns: Trading at a P/E ratio of 40.8x, recent insider share sales, and declining profitability raise red flags. CEO Michael Saylor’s share divestment and the company’s disclosure of remaining unprofitable add to the concerns.
• Analyst View: The article lists MSTR as one of the overheated AI stocks to sell, emphasizing the need for caution amid its dependence on volatile Bitcoin and potential financial challenges.

3. SoundHound AI (SOUN):

• Current Situation: SoundHound AI gained market attention following Nvidia’s disclosed stake in the company. However, its recent earnings report, while better than the previous year, did not meet expectations.
• Concerns: The stock’s surge in the past month set high benchmarks, and concerns are raised about the valuation versus performance. Despite management optimism, the article suggests the stock price might need to adjust to a more reasonable level.
• Analyst View: SoundHound AI is included in the list of overheated AI stocks to sell, with a cautionary note about its stock price possibly adjusting in the interim.

Conclusion:

• The article raises broader concerns about the AI market resembling a potential bubble and draws parallels to the dot-com burst.
• Overheated AI stocks are identified based on factors such as elevated valuations, dependence on volatile assets like Bitcoin, and concerns about meeting market expectations.
• Investors are advised to exercise caution and consider potential corrections in these stocks before it’s too late.

Disclaimer: On the date of publication, Stavros Tousios did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.