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The Fall of AI Stock Investing: Why the Hype is About to Burst

AI-themed stocks, such as NVIDIA, have been experiencing a meteoric rise.

As of the time of writing, NVIDIA’s stock has surged by an astounding 170% in 2023, reaching an impressive $380 per share.

However, it is important to note that the current valuation of NVIDIA stands at 26 times its sales, with a staggering P/E ratio of nearly 200, which can only be described as absurd.

That means that the market is valuing this company at 26 times their annual revenue.

Is the internet bubble repeating?

It is crucial to consider historical examples to gain perspective. At its peak in 2000, Sun Microsystems, a renowned stock of that era, achieved a valuation of 10 times its sales.

When internet bubble burst and stock took a massive beating in the next years, this is what its CEO had to say to stock holders:

“At 10 times revenues, to give you a 10-year payback, I have to pay you 100% of revenues for 10 straight years in dividends. That assumes I can get that by my shareholders. That assumes I have zero cost of goods sold, which is very hard for a computer company. That assumes zero expenses, which is really hard with 39,000 employees. That assumes I pay no taxes, which is very hard. And that assumes you pay no taxes on your dividends, which is kind of illegal. And that assumes with zero R&D for the next 10 years, I can maintain the current revenue run rate. Now, having done that, would any of you like to buy my stock at $64? Do you realize how ridiculous those basic assumptions are? You don’t need any transparency. You don’t need any footnotes. What were you thinking?”

This quote highlights the absurdity of a stock trading at 10 times its revenue. Now, if we replace every instance of 10 with 26, we find ourselves describing NVIDIA.

Typically, when such situations arise, it is often an indication that it is already way too late to invest.

Investors who enter the market at this stage are driven by the Fear of Missing Out (FOMO), a sentiment that usually leads to big losses.

The best market top indicator

Recently, an incident caught my attention. As I was leaving the office, an elderly gentleman approached me on the street, exclaiming, “I was just looking for you!”

He continued, “I’m interested in purchasing those index funds you mentioned in your webinars. I want to invest in AI.”

The fact that someone who is not a member of my programs, with limited funds, is determined to invest in AI stocks serves as a significant indicator that the AI market is significantly overheated. Investors who jump in at this point are likely to face substantial losses.

This scenario brings to mind the hype surrounding gold back in 2011 when everyone believed it was a foolproof investment. However, it eventually proved to be a bubble that burst – gold went down 40% after that.

Drawing parallels, we can observe similar occurrences with Zoom, which was way overvalued during the pandemic, experiencing an eventual drop of 88%.

And Cisco’s absurd valuation in 2000. Cisco then plummeted by 90% and, even after 23 years, still hasn’t reached its peak from 2000.

I must emphasize that artificial intelligence, as a technology, is one of the most disruptive and significant technologies in history. It is likely even more important than the invention of personal computers or smartphones.

However, technology is one thing, investing in stocks is a completely different matter.

AI stocks are now in a typical bubble. And all the bubbles eventually burst.

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