Many artificial intelligence (AI) stocks have generated great returns for investors over the past year. But along the way, that has resulted in some stocks reaching absurdly high valuations. In some cases, investors are paying massive premiums for future growth.
High valuations may sometimes be warranted, but in some situations, the premium investors are paying may simply be far too high, putting them at risk for corrections down the road. Three of the most expensive AI stocks to own right now are Nvidia (NASDAQ: NVDA), SoundHound AI (NASDAQ: SOUN), and MicroStrategy Incorporated (NASDAQ: MSTR). Are these shares worth their inflated valuations, or is it time to step away from these high-priced stocks?
1. Nvidia
Chipmaker Nvidia has been symbolic of AI's meteoric rise in popularity over the past year. At more than $2 trillion, the stock's market cap has soared to new heights. And unsurprisingly, investors are paying a big premium for a piece of the business.
At 36 times the company's trailing revenue, this highly coveted AI stock doesn't come cheap. The bad news for value investors is that it may not get any more affordable as Nvidia has remained a hot buy this year, rising around 80% in value since the start of January.
For fiscal 2024, which ended on Jan. 28, the company's revenue soared by 126% to just under $61 billion while posting profits of nearly half that -- $30 billion. If Nvidia can continue growing at such an incredible pace and keep up an impressive profit margin, it could still look like a cheap buy when bought for the long haul. In Nvidia's case, the AI stock could still be well worth its high valuation.
2. SoundHound AI
Shares of SoundHound AI took off earlier this year after investors learned that Nvidia has invested in the AI business. SoundHound uses AI to enable conversational experiences, such as in drive-thrus to expedite and improve the ordering process for customers. There's significant potential there, but this is still a bit of an unproven business, with SoundHound reporting $46 million in revenue last year and its net loss nearly doubling that tally, totaling a negative $89 million.
SoundHound hasn't proven it can be profitable, and investors are taking a leap of faith with the business, largely, it appears, on the hopes that Nvidia is right and that it has found a promising AI business to invest in. At $2.5 billion, SoundHound's market cap isn't large, but given its relatively modest revenue, investors are paying a multiple of 45 times its trailing revenue.
SoundHound does have the potential to be a good buy if its business proves it can be profitable while growing. But as of right now, that simply isn't the case, and the stock's multiple may be too rich to justify an investment. Unless you have a high risk tolerance, you may want to think twice about owning the stock.
3. MicroStrategy
The third AI stock on this list is MicroStrategy, which uses AI in enterprise analytics to improve decision-making and give users more useful and actionable insights. It can help users with what-if scenarios and to learn more about their businesses and key drivers.
MicroStrategy's fundamentals haven't been all that impressive, with the company reporting $496 million in revenue last year, which was flat from the previous year. And its operating loss totaled $115 million, as this is also a company that struggles with profitability.
At nearly 60 times its trailing revenue, this is one of the most highest priced AI stocks investors can buy. A big reason the stock has likely been a hot buy this year, rising 137% thus far, is due to the strength of Bitcoin.
MicroStrategy has been acquiring bitcoin and has likely been winning over crypto investors along the way. But for long-term investors, there's nothing here to justify such a steep premium for MicroStrategy. This could turn out to be a risky stock to hold, given its expensive price tag.
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David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bitcoin and Nvidia. The Motley Fool has a disclosure policy.
