Market research company warn of AI stocks selling cheap; say they point to a 'dangerous sign'

Market research company, Sevens Report Research founder Tom Essaye has raised caution for investors that the relatively cheap valuations of several high-flying AI stocks may not be the buying opportunity they appear to be.

According to a report by Business Insider, in a note, Eassye said that the low forward price-to-earnings (PE) ratios could reflect the growing fears that the data center boom may stall. For comparison, the S&P 500 trades at a forward PE of 21.5. Essaye noted that growth stocks typically command higher multiples because of their future earnings potential. The fact that AI stocks are trading at relatively low valuations suggests skepticism about whether those earnings will materialize.

AI stocks trading below growth expectations

Essaye highlighted four major AI-linked stocks and their current valuations:

Risk of Pullback

Essaye further warned that if AI adoption falls short, companies could cancel large-scale data center projects, leading to “massive order cancellations” for chipmakers and hardware suppliers. He cited Google as an example: “If GOOGL cancels building 10 data centers because the return isn’t there, that will result in massive order cancellations at NVDA, MU, AVGO, SNDK, etc.”

A recent example of this unease is Oracle, whose shares have dropped about 25% since June 1 as it poured money into AI infrastructure. Essaye compared the current environment to the dot-com bubble, which burst in 2000 when internet adoption failed to deliver profits as quickly as expected.Essaye clarified that he isn’t calling a market top but warned that the parallels are concerning. “This fear has been around for several months, and it isn’t appearing yet. However, it’s not without precedent because this is exactly how the dot-com bubble burst,” he wrote.