Investors should expect a steep selloff among artificial intelligence stocks, as Wall Street cashes in on the high valuations many companies in this sector provide. On the other hand, some high-potential AI names remain overlooked, and the recent AI craze has done little to uplift their valuation. Thus, as the rally cools, smart investors will seek overlooked opportunities, shifting the spotlight to other businesses.
Considering this likely eventual trend, investors would be best-served shifting their focus from over-hyped AI stocks to undervalued alternatives. The latter will fare much better when investors inevitably start taking profits and the rally cools.
AI Stock to Sell: Nvidia (NVDA)
Nvidia (NASDAQ:NVDA) features prominently in my recent AI-related articles, and its rally has surpassed my expectations. However, as NVDA stock balloons, it only strengthens my increasingly bearish view. Paying $446 per share now seems absurd due to massive overvaluation when considering the company’s sales and earnings. But, as with all bubbles, fundamentals are usually thrown out the window, so I digress.
Let’s look at why NVDA stock is so expensive instead. First, the main argument by big money investors is that Nvidia dominates AI chips, and that the AI industry is well-positioned to grow exponentially. Second, these same investors expect a 51% compounded annual growth rate in Nvidia’s data center segment. I believe both of these estimates are grossly overblown.
Let’s start with the first one. Yes, Nvidia does dominate AI chips, for now. There will be strong competition in this sector, which will be evident by the time AI truly starts generating substantial sales. Most semiconductor companies are not sleeping, and are now pouring money into AI chip development. Unfortunately, this future competition is rarely mentioned with respect to NVDA stock, and I think is yet to be priced in.
For the second argument, I disagree that Nvidia could scale their data center segment that fast. Most of its AI chips are being sold to AI startups, often for more than $46,000 each. These AI startups generate minimal sales and rely entirely on bigger companies that could pull the plug anytime.
AI Stock to Buy: Taiwan Semiconductor (TSM)
If you’re considering NVDA stock, why not buy Taiwan Semiconductor (NYSE:TSM) instead? It has taken the role of being the “man behind the curtain,” running the AI show. Almost every AI chip you can think of is actually sourced from Taiwan Semiconductor. This includes, obviously, Nvidia’s chips, as well as those of other potential AI competitors. Plus, Taiwan Semiconductor comes with a massive moat. In my view, this company should be the one with a $1 trillion valuation.
Naturally, many would point out the geopolitical risks of Taiwan Semiconductor. But let’s think realistically. If geopolitical risks are applied via a significant discount to TSM shares, why wouldn’t they extend to other semiconductor companies too? Since most chips are sourced exclusively from Taiwan Semi, this risk should flow down into the valuations of companies like Nvidia. That’s yet another reason why I think its valuation is overblown.
Additionally, unlike Nvidia’s high markup, this company’s products lack price caps and offer limited alternatives to clients. You could also say that it has a large amount of sales to China, but that’s not really true. Only 10.8% of its sales are to China, compared to Nvidia’s 22%. Thus, it’s my view that the way to play the semiconductor space relative to the AI boom is TSM stock.
AI Stock to Sell: C3.ai (AI)
C3.ai (NYSE:AI) is another Wall Street darling that is built quite like a house of cards. Many C3.ai investors struggle to identify its products or understand its operations. I would associate that with the company’s excellent marketing.
On the surface, the best way to explain C3.ai would be “a company serving diverse sectors with AI software solutions.” But let’s look deeper. First, how diverse is it? Roughly 40% of the company’s revenue comes from Baker Hughes (NASDAQ:BKR). Spruce Point Management predicts the Baker Hughes partnership revenue for C3 may diminish, or end, by 2025. It has some smaller partnerships with other bigger names, but they have less tangible significance.
As for the AI software part, C3.ai brings nothing new to the table. The company does provide some neat CRM suites, but the competition will be tough in this space.
All in all, $40 per share for this stock? I think it’s much more reasonable to look elsewhere!
AI Stock to Buy: Fortinet (FTNT)
Fortinet (NASDAQ:FTNT) has been heading the opposite way of C3.ai. As of writing, their share price tumbled to $56.80 a pop. That’s mostly due to Fortinet’s recent earnings results, which showcased revenue that missed expectations by 0.72%. In return? Almost a third of their valuation was wiped out overnight. Indeed, this smells like a great opportunity to snap up the cybersecurity stock, which integrates AI for its solutions.
Regardless of the recent miss and decline, it is a fast-growing company with robust profitability metrics. Gurufocus forecasts a $120 fair value for C3.ai through 2026, showing impressive upside for this stock so many feel is overvalued at current levels. I disagree.
On the date of publication, Omor Ibne Ehsan 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.
