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Are These 3 AI Stocks’ High Valuations Worth the Risk?

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By Edith Muthoni

Updated Mar 22, 2024

Many artificial intelligence (AI) stocks produced excellent returns for investors last year. However, this has resulted in certain equities being overvalued. In certain circumstances, investors are paying exorbitant premiums for potential development.

High valuations are sometimes justified, but in other cases, the premium investors pay is simply too high, placing them at risk of future corrections. Three of the most expensive AI stocks to own right now are Nvidia (NVDA 1.18%), SoundHound AI (SOUN -15.76%), and MicroStrategy Incorporated (MSTR 3.41%). Are these stocks worth their inflated values, or should investors avoid them?

Nvidia

Chipmaker Nvidia has symbolized AI’s dramatic ascent to prominence over the last year. The stock has reached unprecedented heights, with a market capitalization of more than $2 trillion. Unsurprisingly, investors pay a high premium for a share of the company.

This highly sought-after AI stock is expensive, trading 36 times the company’s trailing revenue. Moreover, Nvidia has remained a hot buy this year, increasing its value by over 80% since the beginning of January.

For fiscal 2024, which concluded on January 28, the company’s revenue increased by 126% to just under $61 billion, but profits were nearly half that, at $30 billion. If Nvidia can continue to develop rapidly while maintaining a strong profit margin, it may still appear to be a bargain when purchased over time. In Nvidia’s case, the AI stock may still be worth its lofty value.

SoundHound AI

Shares of SoundHound AI skyrocketed early this year after investors discovered that Nvidia had invested in the AI industry. SoundHound employs artificial intelligence to enable conversational interactions, such as those seen in drive-thru lanes, to speed up and improve customer ordering processes. There is considerable promise in that, but this is an unproven business.

SoundHound reported $46 million in revenue last year and a net loss nearly twice that figure, totaling a negative $89 million. With these results, the firm has yet to prove its profitability, and investors are taking a chance on the firm. At $2.5 billion, SoundHound’s market cap isn’t big, but given its relatively small revenue, investors are paying a ratio of 45 times its trailing revenue.

SoundHound has the potential to be a fantastic investment if its business proves to be profitable while expanding. But as of right now, this isn’t the case, and the stock’s multiple may be too high to warrant an investment. Unless you have a high-risk tolerance, you should think twice about acquiring this stock.

MicroStrategy

The next AI stock on this list is MicroStrategy, which uses AI in enterprise analytics to improve decision-making and provide users with more meaningful and actionable information. It can assist users in exploring what-if situations and learn more about their businesses and key drivers.

MicroStrategy’s fundamentals haven’t been all that impressive, with the company reporting $496 million in revenue last year, which was flat from the previous year. Additionally, the company’s operational loss came to $115 million, indicating that it is not profitable.

This is one of the most expensive AI stocks available to investors, at almost 60 times its trailing revenue. The strength of Bitcoin is probably a significant factor in the stock’s recent 137% rise, making it a hot buy this year. MicroStrategy has perhaps won over cryptocurrency investors by accumulating Bitcoin. However, Investors may be paying too high a premium for a speculative play.

While these three AI stocks hold promise in their respective domains, their lofty prices warrant careful consideration. It is essential to conduct thorough due diligence and weigh the potential rewards against the inherent risks before making investment decisions in the dynamic AI market.

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