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Yahoo
5 minutes ago
- Business
- Yahoo
The 5 arguments against continued dominance for AI stocks
AI stocks have surged since November 2022, with Nvidia up 761% and Palantir more than 600%. But some experts warn of high valuations and potential overestimation of AI's economic impact. Geopolitical risks, like China-Taiwan tensions, could also disrupt the AI supply chain. Since November 2022, artificial intelligence stocks have been the place to be in the market. Nvidia is up 761% over that time. Palantir is up 604%. Taiwan Semiconductor has returned 165%. And Microsoft is up 88%. It's been a gold rush. But how long can the AI trade last? Some experts, like Morgan Stanley's Head of Global Research Katy Huberty, have said that we're still in the early innings of the technology and robust returns still lie ahead. Few seem to refute the idea that AI will transform the US economy to some degree and be an eventual boon for profits. But some have urged caution about investing in the theme after such a huge run of outperformance. Irrational exuberance and greed are running rampant, they worry, potentially setting AI stocks up for a spectacular bust somewhere down the line. While the outlook on the technology's role in the economy is bullish, there are some threats to AI's dominance in the stock market. Five of them are detailed below. Generally speaking, AI stocks are expensive with their prices relative to their earnings over the last 12 months at elevated levels. For example, the iShares Future AI & Tech ETF (ARTY) has an average trailing 12 months PE ratio of 35.2, and the The Technology Select Sector SPDR Fund (XLK) is trading at 36.7 times earnings. Nvidia trades at a 45 PE ratio. By comparison, the S&P 500, which is at historically expensive levels, has a 23.7 PE. While AI stocks may have stronger growth prospects than those in other industries, high valuations mean those prospects are already priced in. If actual earnings performance underwhelms compared to expectation, then the stocks could start to underperform. High valuations tend to weigh on long-term performance. For example, Microsoft traded at 72-times trailing earnings in 2000. While it went on to lead the way in internet technology, it didn't recover its 2000 highs until 2016. AI may make tasks more efficient, but perhaps not to the degree the market thinks, said Jim Covello, head of Global Equity Research at Goldman Sachs, in a June 2024 report. "People generally substantially overestimate what the technology is capable of today. In our experience, even basic summarization tasks often yield illegible and nonsensical results," Covello wrote. "This is not a matter of just some tweaks being required here and there; despite its expensive price tag, the technology is nowhere near where it needs to be in order to be useful for even such basic tasks," he continued. "And I struggle to believe that the technology will ever achieve the cognitive reasoning required to substantially augment or replace human interactions." This could hurt AI firms, which are pumping hundreds of billions into building out AI infrastructure. What if, in the end, the mammoth spending isn't worth it? Another risk is that you end up investing in the wrong stocks altogether. Just because certain stocks are pioneering a technology, doesn't mean that they will continue to do so. The presumption five years ago "would have been that Intel would be the dominant player" in the AI space, Research Affiliates Founder Rob Arnott told BI in November. "Well, Intel is teetering perilously close to irrelevance, and Nvidia wasn't on anyone's radar screen five years ago. So disruptors get disrupted." As foreign investors start to pull back from US Treasury bonds amid an expanding national debt, and as tariffs and Trump's tax cut bill threaten to boost inflation, long-term Treasury yields are trending upward. When long-end yields go too high, it has historically hurt growth stock performance and brought down valuations. Higher-risk free yields start to attract money, and risky and expensive stocks start to lose their luster. One of the key players in AI development is chipmaker Taiwan Semiconductor. If China were to invade Taiwan, as it has threatened, the AI supply chain could be severely interrupted. "The moment conflict starts in the Taiwan Strait, you have to assume that TSMC shuts down very, very quickly regardless of what any of the players decide to do — regardless of whether anyone decides to disrupt the supply chain or destroy this or that or not," said Chris Miller, author "Chip War," in an interview with BI last year. "Taiwan imports a big chunk of its energy and chip factories need energy. And there are a bunch of critical chemicals and materials that are imported into Taiwan, and those would stop," he continued. "What's more, you couldn't get the ships out of Taiwan if there was a shooting war going on. And so your incentive to produce a lot also declines very rapidly if you can't actually sell chips or get them off-island." Read the original article on Business Insider Error in retrieving data Sign in to access your portfolio Error in retrieving data Error in retrieving data Error in retrieving data Error in retrieving data
Business Insider
8 hours ago
- Business
- Business Insider
The 5 arguments against continued dominance for AI stocks
Since November 2022, artificial intelligence stocks have been the place to be in the market. Nvidia is up 761% over that time. Palantir is up 604%. Taiwan Semiconductor has returned 165%. And Microsoft is up 88%. It's been a gold rush. But how long can the AI trade last? Some experts, like Morgan Stanley's Head of Global Research Katy Huberty, have said that we're still in the early innings of the technology and robust returns still lie ahead. Few seem to refute the idea that AI will transform the US economy to some degree and be an eventual boon for profits. But some have urged caution about investing in the theme after such a huge run of outperformance. Irrational exuberance and greed are running rampant, they worry, potentially setting AI stocks up for a spectacular bust somewhere down the line. While the outlook on the technology's role in the economy is bullish, there are some threats to AI's dominance in the stock market. Five of them are detailed below. 1. Valuations Generally speaking, AI stocks are expensive with their prices relative to their earnings over the last 12 months at elevated levels. For example, the iShares Future AI & Tech ETF (ARTY) has an average trailing 12 months PE ratio of 35.2, and the The Technology Select Sector SPDR Fund (XLK) is trading at 36.7 times earnings. Nvidia trades at a 45 PE ratio. By comparison, the S&P 500, which is at historically expensive levels, has a 23.7 PE. While AI stocks may have stronger growth prospects than those in other industries, high valuations mean those prospects are already priced in. If actual earnings performance underwhelms compared to expectation, then the stocks could start to underperform. High valuations tend to weigh on long-term performance. For example, Microsoft traded at 72-times trailing earnings in 2000. While it went on to lead the way in internet technology, it didn't recover its 2000 highs until 2016. 2. AI technology doesn't end up being quite as impactful as investors think AI may make tasks more efficient, but perhaps not to the degree the market thinks, said Jim Covello, head of Global Equity Research at Goldman Sachs, in a June 2024 report. "People generally substantially overestimate what the technology is capable of today. In our experience, even basic summarization tasks often yield illegible and nonsensical results," Covello wrote. "This is not a matter of just some tweaks being required here and there; despite its expensive price tag, the technology is nowhere near where it needs to be in order to be useful for even such basic tasks," he continued. "And I struggle to believe that the technology will ever achieve the cognitive reasoning required to substantially augment or replace human interactions." This could hurt AI firms, which are pumping hundreds of billions into building out AI infrastructure. What if, in the end, the mammoth spending isn't worth it? 3. Current leaders may not remain Another risk is that you end up investing in the wrong stocks altogether. Just because certain stocks are pioneering a technology, doesn't mean that they will continue to do so. The presumption five years ago "would have been that Intel would be the dominant player" in the AI space, Research Affiliates Founder Rob Arnott told BI in November. "Well, Intel is teetering perilously close to irrelevance, and Nvidia wasn't on anyone's radar screen five years ago. So disruptors get disrupted." 4. Rising long-term interest rates As foreign investors start to pull back from US Treasury bonds amid an expanding national debt, and as tariffs and Trump's tax cut bill threaten to boost inflation, long-term Treasury yields are trending upward. When long-end yields go too high, it has historically hurt growth stock performance and brought down valuations. Higher-risk free yields start to attract money, and risky and expensive stocks start to lose their luster. 5. Geopolitical uncertainty One of the key players in AI development is chipmaker Taiwan Semiconductor. If China were to invade Taiwan, as it has threatened, the AI supply chain could be severely interrupted. "The moment conflict starts in the Taiwan Strait, you have to assume that TSMC shuts down very, very quickly regardless of what any of the players decide to do — regardless of whether anyone decides to disrupt the supply chain or destroy this or that or not," said Chris Miller, author "Chip War," in an interview with BI last year. "Taiwan imports a big chunk of its energy and chip factories need energy. And there are a bunch of critical chemicals and materials that are imported into Taiwan, and those would stop," he continued. "What's more, you couldn't get the ships out of Taiwan if there was a shooting war going on. And so your incentive to produce a lot also declines very rapidly if you can't actually sell chips or get them off-island."
Yahoo
26-02-2025
- Business
- Yahoo
Morgan Stanley: Nvidia's Q4 Earnings Could Send AI Stocks Soaring--Or Crashing
Morgan Stanley (NYSE:MS) believes Nvidia's (NASDAQ:NVDA) Q4 earnings could send Asian AI stocks soaring by double digits if the chipmaker delivers a revenue beatbut a miss could trigger a selloff, according to a report from Katy Huberty, the firm's global director of research. Warning! GuruFocus has detected 7 Warning Sign with MS. With AI-exposed stocks consolidating ahead of earnings season, Huberty noted that Morgan Stanley's Asia Tech analysts see a 3-15% upside for AI names if Nvidia surpasses revenue expectations, while a 5-10% decline is possible if sales disappoint. The report, however, did not specify individual stocks. Wall Street is expecting Nvidia's Q4 revenue to jump 73% year-over-year to $38.16 billion, with earnings rising 64% to $0.85 per share. The company is set to report results Wednesday after market close. While Nvidia stock is up 3.45% over the past six months, it has fallen more than 8% in the past month, reflecting market caution ahead of its earnings release. This article first appeared on GuruFocus. Sign in to access your portfolio
