The rally we’ve seen in AI stocks has been incredible to watch. Accordingly, investors who have missed this rally may be eager to get in. Fear of missing out is picking up, as investors pile into high-flying names which continue to surge even higher. However, this has led to stocks at risk of a selloff.

However, Chris Montagu, a Citigroup strategist has sounded the alarm bells on how increased optimism in United States tech stocks could deepen market downturns. He noted that the investors who have expected more gains, are now running a risk of big-time losses, if this trend reverts. 

Nevertheless, the S&P 500 climbed to new peaks amid positive tech earnings. However, there are many that are now calling for caution, as interest rate cuts could take longer to materialize. Personally, I’m of the view that this AI-led rally has gone too far in specific names. Here are three I’m most cautious on right now.

C3.ai (AI)

C3.ai (NYSE:AI) once stood at the pinnacle of the AI sector, until its share price tumbled more than 50% from its peak of nearly $50 per share in 2023. Recently, AI stock fell 16% because of disappointing financials and stacked-up losses. The company projected a $46 million operating loss, twice the expected amount that Wall Street predicted it would lose. The company also abandoned its profitability target. 

C3.ai, a well-funded tech giant, has a patented AI platform that simplifies model integration, opening doors to steady customer acquisition and revenue growth. Despite a small pothole, Q3 revenue nearly doubled over the past four years. Shifting to consumption-based pricing has accelerated growth on the horizon.

With a price-to-sales ratio of 9.7-times, analysts forecast revenue stepping on the $443 million line in two years. I think this stock could certainly have room to move higher, but like the other picks on this list, I’m remaining cautious. I think more downside risk is likely, given the over-exuberance seen in the AI space. Thus, this is a stock I’m going to be avoiding until there are signs valuations make sense in this space.

Palantir Technologies (PLTR)

Palantir Technologies (NASDAQ:PLTR) recently celebrated its fifth consecutive profitable quarter and its first good year, with PLTR stock surging nearly 20% on its incredible earnings beat.

Palantir’s fourth quarter revenue rocketed 25%, with a 70% boost in the U.S. enterprise segment revenue, $131 million. Over $1 billion in commercial revenue was made for the year, with a 32% increase in segment revenue to $284 million. 

Palantir’s AI Platform is getting plenty of demand, surpassing its October goals of 500 boot camps. With 560 completed across 45 companies this year, the company’s U.S. customer count has grown by 55% to 221. Palantir expects continued expansion, especially after merging AIP with its Foundry platform. Growth in the public sector stunted and fell to 11% from 23% in the previous year.

Of course, these numbers are certainly welcome, and invite a narrative that AI adoption is finally flowing through to the company’s numbers. However, I’d be wary of extrapolating these results two, three or five years down the road. There’s just too much uncertainty right now, and like the other companies on this list, I think Palantir’s valuation has gotten ahead of itself.

Nvidia (NVDA)

I have to be clear, I remain bullish on Nvidia (NASDAQ: NVDA) over the long-term. This semiconductor producer rules atop the AI space, producing high-performance chips that drive the growth we’re seeing across the broader AI sector.

However, with a stock price that has topped $625 per share and new price targets of $1,100, investors have to ask the question of whether this rally has been overdone. There’s simply too much excitement around this name driving an incredibly high valuation (Nvidia actually briefly topped Amazon (NASDAQ:AMZN) in terms of market value this week). That alone speaks volumes about how incredible this stock’s recent rally has been.

Risks also remain with the company’s business model. Despite a robust supply chain, Nvidia may struggle to meet future demand for AI chips, further triggering product price flare-ups. The anticipated H200 chips rollout in 2024 will further boost its advantageous business mix. However, everything depends on execution, and the fact that NVDA stock is priced to perfection doesn’t leave much room for any downside moving forward.

Overall, I think Nvidia is a stock to own, not trade. At these levels, I’d consider trimming exposure, until the froth in the market abates. Yes, NVDA stock could head higher from here, but I think risks are skewed to the downside for now.

On the date of publication, Chris MacDonald 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.