It’s hard to tell how this ongoing artificial intelligence (AI) boom is going to end. It could have legs to run, a correction could hit sometime soon, or it could keep heating up, only to end in a devastating bursting of the bubble. Indeed, if you have concerns that AI stocks may be in a bit of a bubble, you’re definitely not alone. A lot of the AI-driven data centre IPOs going live south of the border have garnered an obscene amount of interest.
And while there’s no shortage of speculative activity surrounding meme stocks, AI momentum plays, and even cryptocurrencies, I do not think that the broad stock market (let’s say the S&P 500) is in a bubble. And the finance and energy-heavy TSX Index, I think, still looks fairly valued, even slightly cheap, versus the U.S. indices.
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Is AI causing a bubble to form?
In any case, even the Nasdaq 100, with its concentration in mega-cap tech, I think, isn’t in a bubble. Sure, valuations are skewing on the hot side, but if the AI revolution really does result in a rise in corporate profits and GDP, perhaps things really are different this time.
Of course, it’s hard to tell if they really are until after the fact. Either way, I think that other than the red-hot momentum stocks in AI and crypto that have doubled up many times over in the last year or even the last couple of months, the market is still on a steady footing.
Sure, that red-hot IPO that tripled in a week may be ready to implode by more than 50%. However, Alphabet (NASDAQ:GOOG), one of the AI leaders, isn’t just bubbly at just 21.2 times forward price-to-earnings (P/E); it’s way too cheap, likely due to fears that AI will weigh heavily on its lead in the search business.
Alphabet: An alpha bet amid the AI boom!
While AI will upend many parts of the software scene, I do think that Google will ultimately be a net AI winner when all is said and done. Sure, it may lose some lustre in search, but it’s nothing that the firm can’t recoup as its AI offering looks to grow in other new markets.
Additionally, the last Alphabet quarter, I believe, was riddled with strength, not weakness or vulnerability. As such, I think the healthy dose of skepticism facing such mega-cap AI plays is conducive to long-term appreciation. With modest multiples, AI bubble fears here and there, and indications that the latest rally is much-hated, I find it hard not to be bullish, even with folks like Sam Altman using the “b” word (bubble) in recent talks.
If investors stick with proven leaders like Alphabet, I think they’ll be fine, even as the AI boom runs into its next breather at some point down the line. Stay away from the hyped AI plays, speculative startups, and IPOs, and I think investors will do just fine over time.
The bottom line
In my humble opinion, the AI boom is still in play. But you’ve got to be careful how to play it. And while there will be many AI up-and-comers that will fall (perhaps more than 50–70%), I do think that mature firms can stand tall as disruptors with AI as a tool to take share away from software companies that are too slow in the race.
So, if you’re risk-averse but still want to bet on AI, stick with modest P/E multiples of large, established firms that have a vision, proven leadership, and an AI strategy to get the job done. Alphabet fits the bill on all fronts, at least in my books.
