Wall Street has become particularly bullish about tech stocks this year, with advances in artificial intelligence (AI) sending shares in many companies skyrocketing. The industry has massive potential, projected to expand at a compound annual growth rate of 37% through 2030 per Grand View Research. The technology will likely boost multiple industries, including cloud computing, manufacturing, healthcare, and consumer tech.
However, a recent bull run means short-term growth for many AI companies is already priced into their stocks. As a result, those interested in investing in the booming market will want to steer clear of some companies that aren't offering much value.
So here are three stocks that might be getting a little too expensive.
Nvidia(NASDAQ: NVDA) shares have soared 180% year to date, benefiting from Nvidia becoming the go-to for AI-minded companies seeking chips. The tech giant has dominated the graphics processing unit (GPU) market for years, currently with 87% market share. GPUs are crucial for developing AI models, and Nvidia is massively profiting by supplying its hardware to multiple companies.
In the second quarter of 2024 (ending July 2023), Nvidia's revenue jumped 101% year over year to $13.5 billion. The growth was primarily driven by a 171% increase in data center revenue, thanks to a spike in the sale of AI GPUs.
Despite the glowing quarter, Nvidia's stock has actually declined by 13% since posting its earnings. Excitement over the company's prospects in AI might have hit a peak, with much of its growth potential for the next year already priced into the stock.
Meanwhile, Nvidia's price-to-earnings ratio (P/E) of 100 indicates its shares are offering very little value. A P/E of 20 or less usually indicates a stock is undervalued, and Nvidia still has a long way to go before being anywhere near a bargain. As a result, if you're looking to invest in AI, it might be worth considering cheaper options such as Microsoft.
2. Advanced Micro Devices
Like Nvidia, Advanced Micro Devices(NASDAQ: AMD) has enjoyed a rally thanks to its prospects in AI as a leading chipmaker. The company's shares are up 48% since Jan. 1. However, unlike Nvidia, it is still in the fairly early stages of its AI expansion. The company has lost ground to Nvidia this year and has focused much of its resources on playing catch-up.
In June, AMD unveiled the latest chip in its MI300 series, describing it as its most powerful GPU ever. The chip is expected to begin shipping in 2024 and has garnered significant interest from companies across tech. AI-driven companies have been calling for increased competition in the chip market, which should reduce the cost of AI hardware. It remains to be seen what firms will sign on as clients to AMD's new offerings, but it could receive a much-needed boost to revenue next year.
In Q2 2023, AMD's revenue fell 18% year over year after declines in multiple segments. Its most significant losses came from its client segment, which includes revenue from PC component sales to consumers. The PC market has suffered from macroeconomic headwinds over the last year, with AMD being one of the biggest victims.
A stock rally and poor earnings have led AMD's P/E to hit 55. The figure makes its stock a better value than Nvidia's. However, it's difficult to justify AMD's high stock price when Microsoft's P/E is 34 and Alphabet's is 29.
Amazon(NASDAQ: AMZN) has been on a roll in 2023, with a solid recovery in its e-commerce business and promising inroads in AI. The company's stock is up 54% since the start of the year and has a strong outlook over the long term. However, its P/E currently sits at 101, making it the most expensive stock on this list when comparing its stock price to recent earnings.
Last year, macroeconomic headwinds caused steep declines in Amazon's retail business. In fiscal 2022, the company reported total operating losses of $10.6 billion in its two e-commerce segments. Amazon has made significant progress this year, with its North America segment returning to profitability in Q1 and hitting over $3 billion in operating income in Q2 2023.
However, the company still has a long way to go before its earnings live up to its share price. As a result, prospective investors will need to be patient with Amazon. Its e-commerce business is back on a growth path, and it is quickly expanding its AI offerings on its cloud platform, Amazon Web Services. The tech giant likely has a lucrative future, but be prepared to hold its stock for the very long term to see a solid return on your investment.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Dani Cook has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Alphabet, Amazon.com, Microsoft, and Nvidia. The Motley Fool has a disclosure policy.