Investing in AI stocks is the latest trend, but it’s not for every investor. Over the past few years, investors (myself included) have been ignited by hot trends like work-from-home and metaverse-focused stocks, and some companies have suffered painful losses.
Applying this knowledge to other investment trends can help you stay safe during this AI craze. So before you consider investing in an AI company, consider the following topics.
1. Is the rating correct?
Valuation is an important subject because even the best company at the wrong price can be a disaster. When evaluating valuations, I always ask, “What kind of growth does this company need to sustain for this valuation to make sense?”Applying this to popular AI stocks Nvidia (NVDA 0.09%) This is a worthwhile move as it is the main culprit in overpaying companies. intention It will benefit greatly from the deployment of AI.
Nvidia’s sales have multiplied 40x and are trading above most stocks’ price-to-earnings ratios (PERs). If Nvidia regains his peak profitability of 38% profit margin, this means his Nvidia earnings will multiply by 105. However, while NVIDIA’s profitability is far from peak, it should improve in the coming quarters thanks to impressive growth projections.
Even if Nvidia’s sales doubled, the P/E ratio would only drop to 53, which is still expensive. Additionally, NVIDIA needs to maintain its revenue levels to be worthy of a valuation, which is not guaranteed after data centers are built to power its AI.
Valuations should always be considered when buying stocks, but they become even more important when a lot of hype surrounds the stock. A simple gut-level check can help you decide if the stock is worth considering.
2. Is it on time?
After passing the valuation test, it’s okay to ask, “Is this AI stock appropriate in the current situation?” If you are a young investor with a long investment horizon, the answer is probably yes. However, if you are nearing retirement or have already retired, investing in a volatile industry may not be the right choice.
There is a lot of talk about how AI will change the world, but there are no guarantees about its overall impact. Gartner has a visual known as the “Gartner Hype Cycle” that talks about how people view technology as it grows in popularity. In my opinion, we are still on the rollercoaster ride to the top of inflated expectations.
Image Source: Gartner.
The key is to find affordable companies that can survive through a productivity plateau with huge return on investment. Investing in AI may not be the smartest decision if you don’t have the patience or timeframe to follow through on your AI investment.
3. Is AI really impacting this business?
How many companies touted their aspirations for the “metaverse” at the end of 2020, and how many are still pursuing that goal? The same is true for 5G. Many companies have discussed these subjects in presentations and conference calls to please shareholders, but nothing has materialized.
When considering AI stocks, ask yourself if AI is a game changer or just a flash. Large Language Model (LLM) chatbots are all the rage, but do we need them in every aspect of our lives? Probably not.
Consider a company that cloud strike (CRWD -2.92%) again Palantir (PLTR -1.81%)uses AI at its core to power machine learning programs that can process large amounts of data and perform tasks without human intervention. Additionally, ad-based companies such as: alphabet (GOOG -1.38%) (Google -1.25%) and meta platform (meta -0.29%) develops AI models to better evaluate ad audiences and create custom ads tailored to users.
All four companies passed the assessment test and believe AI is a real business driver. Nvidia passed Test 3 with flying colors, but fell badly on the first test, making it a stock worth passing on.
If you are considering AI stocks, ask yourself these three questions: This should help weed out some scammers and leave them with some really good AI investments.
Alphabet executive Suzanne Fry is a member of the Motley Fool’s board of directors. Randy Zuckerberg is the former head of market development and public relations at Facebook, the sister of Meta Platforms CEO Mark Zuckerberg, and a member of the Motley Fool’s board of directors. Keithen Drury has positions in his Alphabet and CrowdStrike. The Motley Fool holds positions with and recommends Alphabet, CrowdStrike, Meta Platforms, Nvidia and Palantir Technologies. The Motley Fool recommends his Gartner. The Motley Fool has a disclosure policy.
