Excitement around artificial intelligence (AI) has been helping fuel the market rally for the past year or so. Businesses are eager to ride AI-powered technology in an effort to improve their operations, make them more efficient and effective. And for many companies, e.g Nvidia (NVDA 2.45%)With revenues and profits skyrocketing in recent quarters, the payoff is already coming through.
But of course there is a lot of hype in AI that has sent many stocks to obscenely high prices. And popular hedge fund manager Ken Griffin thinks investors are getting ahead of themselves.
Additional benefits are more likely outcomes.
In a recent interview with CNBC, Griffin poured cold water on the market’s recent hype surrounding AI. “It’s not clear to me that we’re going to get the productivity gains from AI that the markets are largely hoping for,” he said.
While he sees growing benefits and the potential for AI to replace entry-level jobs (such as call center work), he is highly skeptical of AI replacing fund managers. And while big language models are “good at reconfiguring what’s available for use on the World Wide Web,” he doesn’t believe their usefulness extends much further than that.
This is ultimately the crux of the AI debate these days, and what has driven the stakes so high. If many AI stocks are worth their inflated multiples, then there must be confidence that AI will truly be transformative and not just take over entry-level jobs. If it doesn’t, however, it could undermine the investment thesis behind many growth stocks.
Have AI stocks gotten too hot?
Three red-hot stocks that have doubled in just the last six months and all hinge on a strong future in AI include Nvidia, Arm HoldingsAnd Sound Hound AI. Amidst all this growth, their values have increased significantly. Here’s how those three stocks stack up in terms of their earnings numbers.
P/S ratio data via YCharts
Investors are paying many times more for these stocks and are necessarily assuming higher levels of growth in the coming years. And if this growth doesn’t take off, the risk is that these stocks, at such high prices, could become victims of a sell-off.
Even tech workers aren’t convinced of AI’s effectiveness, according to a recent survey by software company Retool late last year. More than half of the 1,500 tech workers surveyed believe AI is “overrated” and that there isn’t enough evidence to suggest it will change as much as people expect it to.
While ChatGPTE has become a great tool for drafting emails and creating articles, it and other chatbots have proven to be unreliable, sometimes creating “hoaxes” or facts. While AI is showing a lot of promise, the danger is that investors are expecting too much from these next-generation technologies too soon.
Is it time to pull back from AI stocks?
If you’re investing in Nvidia or another high-value tech stock today, you’re likely doing so because of your expectations for its future growth potential, particularly in AI. And as promising as the outlook may be, it’s also important to consider what happens if those expectations fall short, and whether you’d still want to hold the stock if AI-related growth starts to slow. go
Recognizing the assumptions on which you base your investments can help you identify the risks associated with your investments. In Nvidia’s case, its business isn’t entirely dependent on AI, and it could still make a good tech stock for the long haul. But for other stocks, which you’re investing in just because they might do well because of AI, and for which you’ll be paying a higher premium, think twice about those investments. Thinking twice may be the safest option.
David Jagielski has no positions in any stocks. The Motley Fool has positions and recommends Nvidia. The Motley Fool has a Disclosure Policy.