AI Stocks to Sell if the AI Bubble Bursts

The S&P 500 has risen over 50% from its 2022 lows. The primary driver of the stock market’s resilience is enthusiasm around AI stocks. Excitement about artificial intelligence as a revolutionary technology has sent AI shares soaring, creating what many believe is a bubble reminiscent of the dotcom bubble at the turn of the century. Many are now wondering if it’s time to sell.

Similarities to the Dotcom Bubble

Valuations and investor exuberance are not as high as they were during the dotcom crash. However, investors still wonder if the similarities are too significant to ignore. Both bubbles inflated due to the introduction of world-changing technology. Eager investors rushed to secure early gains, leading to potential trouble if expectations don’t align with reality.

Differences in Current Metrics

The good news is that key metrics, like the 12-month forward price-to-earnings ratios, are much lower than during the dotcom peak. The bad news is that each bubble is different, with unforeseen factors that may be at play now, which no one can predict until it’s too late.

Nvidia (NVDA)

Nvidia (NASDAQ: NVDA) is the most obvious choice among AI stocks to sell before a potential bubble bursts. The similarity between Nvidia and dotcom champion Cisco (NASDAQ: CSCO) is striking. Cisco shares surged by roughly 4,500% in the five years before their peak in 2000. Nvidia’s shares are up roughly 4,300% over the past five years. Time will tell if this is a coincidence.

Investors continue to bet bullishly on Nvidia following its recent earnings report. Revenue surged by more than 250% year-over-year, reaching $26 billion, with $22.6 billion from data center sales. This suggests Nvidia is a top investment in AI, seen as digital gold. However, Nvidia’s asset growth has outpaced its revenue growth over the past five years. This indicates that Nvidia’s big bet on AI has not yet produced substantial results. If you need a reason to sell, take that as your signal.

Broadcom (AVGO)

Broadcom (NASDAQ: AVGO) shows real concerns about a current AI bubble. Share prices surged above $1,800 by mid-June and then dropped below $1,600 a week later. This volatility indicates that investors recognize Broadcom may be in an AI-fueled bubble. Although Broadcom isn’t a pure AI stock, the company mentioned ‘AI’ 51 times in its recent earnings call.

Broadcom’s decision to implement a 10-for-one forward stock split suggests that the company feels its share price can’t grow much further. Fundamentals-based screening tools also suggest Broadcom is significantly overvalued. It’s clearly benefiting from the AI halo effect and is at risk as such.

Apple (AAPL)

Apple (NASDAQ: AAPL) stock has surged following the Worldwide Developers Conference (WWDC24). AI is partly responsible for this resurgence, indicating Apple’s exposure to AI bubble hype. Apple introduced iOS 18 and Apple Intelligence at the conference, promising years of upgrades for its massive user base. However, Apple’s revenues are still not as strong as a year ago, raising questions about whether the recent surge is due to AI hype.

Apple produces substantial cash flows, satisfying shareholders. However, if its generative AI efforts prove fruitless, it won’t sustain current share prices.

AMD (AMD)

If the AI bubble bursts, AMD (NASDAQ: AMD) might not meet investor expectations. Analysts see indications of weak competitiveness at price levels between $116 and $132. If AMD continues to struggle in capturing market share from Nvidia, it could fall to these levels. AMD shares are up roughly 14% year-to-date, but with expected revenue growth of 14% in 2024, there may be little reason to invest in AMD currently.

Microsoft (MSFT)

Microsoft (NASDAQ: MSFT) may be overpriced due to AI. The company’s current P/E ratio of 39x is well above its 10-year median. How much of that increase is justified? The $30 CoPilot add-on’s worth is unclear. CEO Satya Nadella initially boasted about its uptake, but little has been said since. Despite strong fundamentals from Windows and Office, it might be a good time to reap profits as bubble concerns persist.

Microsoft (MSFT)

It’s difficult to argue that Microsoft (NASDAQ:MSFT) is ever a stock to sell. It has provided 10X returns over the past decade and Windows and Office continue to provide a fortress of strength in which the company dwells.

Despite those obvious strengths there are concerns that Microsoft is overpriced at the moment primarily due to AI. Any investor has simply to look at the company’s current P/E ratio of 39x, well above its 10-year median.

How much of that increase in valuation is justified? Is the $30 CoPilot add on worth it? No one really knows because as my colleague Dana Blankenhorn pointed out, Microsoft didn’t break out its performance.

CEO Satya Nadella was happy to boast about its initial uptake earlier this year but not much else has been said since. That’s a troublesome sign. Microsoft is well protected by Windows and Office so any AI bubble burst won’t crush it. However, it may not be a bad time to reap profits now as bubble questions continue to swirl.

Intel (INTC)

Intel (NASDAQ: INTC) stock has dropped significantly in 2024. Earlier hype around Intel due to AI has waned. Intel announced the launch of a systems foundry for the AI era, but it lags behind Nvidia in AI chips. Intel’s Gaudi-3 chips are not as powerful as Nvidia’s upcoming Blackwell chips. Intel’s opportunity to benefit from the AI halo may have ended. Its revenues peaked in 2021 and aren’t expected to rebound until 2028.

Taiwan Semiconductor Manufacturing (TSM)

Taiwan Semiconductor Manufacturing (NYSE:TSM) is a stock that is at once one of the best investments and one of those which is most exposed to the AI bubble.

It is one of the best investments at the moment because it is so exposed to the AI opportunity. Taiwan Semiconductor manufacturing serves as the world’s foundry, producing the world’s most advanced chips including those for AI applications. It is because of that excellent positioning that the stock has grown by nearly 80% in 2024.

The flip side of that tremendous growth is obvious: Taiwan Semiconductor Manufacturing is also heavily exposed to the inherent dangers of an AI bubble. Given that TSM provides the actual chips sold by Nvidia, AMD and many others, it stands to be punished heavily if and when things go wrong.

TSM’s P/E ratio is currently the highest it’s ever been. It’s more than double its median over the last decade. That’s a bit worrisome given the fact that the company has been the foundry to the world during that period. The hype around AI is the clear reason it’s become so valuable in 2024. As questions continue to swirl about the true value of AI, TSM will continue to be on bubble watch.

On the date of publication, Alex Sirois did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article. 

Alex Sirois is a freelance contributor to InvestorPlace whose personal stock investing style is focused on long-term, buy-and-hold, wealth-building stock picks. Having worked in several industries from e-commerce to translation to education and utilizing his MBA from George Washington University, he brings a diverse set of skills through which he filters his writing.

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