Market researcher Tom Essaye, founder of Sevens Report Research, is advising investors to be cautious as some artificial intelligence (AI) stocks are trading at relatively low valuations. He suggests this could be a sign that investors are growing concerned about a potential halt to the current data center expansion.
Typically, growth stocks, including those in AI, command higher valuations due to expectations of strong future earnings. Essaye noted that the current low valuations for certain AI stocks imply investor skepticism about whether these companies will achieve their projected earnings potential. He highlighted that this fear has been present for months but has not yet materialized into a market downturn.
Stock Examples and Market Comparison
Essaye provided examples of AI-related stocks and their recent performance and forward price-to-earnings (P/E) ratios, contrasting them with the broader market. The S&P 500 currently has a forward P/E ratio of 21.5.
- Nvidia saw an upside of 44% in the last 12 months and has a forward P/E ratio of 21x earnings.
- Micron Technology experienced a 770% upside over the past year, with a forward P/E ratio of 10x earnings.
- Broadcom’s stock increased by 51% in the last 12 months, and it holds a forward P/E ratio of 24x earnings.
- SanDisk recorded a significant 4,490% upside in the past 12 months, with a forward P/E ratio of 14x earnings.
If the adoption and effectiveness of AI do not meet investor expectations, Essaye warned that this could lead to a pullback in investment. Such a scenario would severely impact sales for companies involved in the AI infrastructure buildout.
Dot-Com Bubble Parallels
Essaye drew a parallel between the current situation and the dot-com bubble, which reached its peak in 2000. He explained that the dot-com bust occurred when the profitability of internet connections did not materialize as quickly as anticipated, leading to a slowdown in infrastructure development.
“Think of it this way: GOOGL (to use one as an example) cancels building 10 data centers because it’s going to cost too much money and the return isn’t there,” Essaye wrote. “That will result in massive order cancellations at NVDA, MU, AVGO, SNDK, etc., because no one needs the chips, networking, memory, or processor power,” he added.
As an illustration of investor unease, Essaye pointed to the recent performance of Oracle stock, which has fallen approximately 25% since June 1, despite the company’s significant investments in AI development.
Helene Elliott is the senior reporter for News Raise. She covers Science news. She also has a keen interest in photojournalism. Helene holds a nomination for the prestigious Red Smith Award. She is married to author Dennis D’Agostino, a former publicist with the New York Mets.
