A Bubble Is Brewing In AI Stocks- Investors Beware

Do you remember the dot-com bubble?

During the the late 1990’s, the Internet was just coming into its own. Investors were excited. They could sense the unlimited potential of the World Wide Web. Millions of people would be linked together in a giant hive-mind of buying, selling, and advertising. The possibilities for generating business revenue were endless.

Unfortunately, it all ended badly. Not the internet itself- which is still rising to new heights of convenience and utility. Rather, the stocks that tried to hitch a free ride on that ascent to the stratosphere came crashing down. Many investors were wiped out.

It’s investing truth that a good business sector does not necessarily make a good stock. In the beginning, a rising tide will lift all boats. But in the end, only the sturdiest of boats will survive. The rest will be at the bottom of the investing ocean, carrying their precious cargo of investor capital to a watery grave.

If you did not experience the dot-com bubble firsthand, don’t worry. Another bubble of titanic proportions is brewing. Like the dot-com bubble, this bubble is also forming in the technology sector.

AI is a promising technology. Many fortunes will be made in AI. But much wealth will also be lost- by investing in overvalued AI stocks.

I want to make it clear that I am not advising you to avoid AI stocks entirely. To do so would be foolish. AI is here to stay- and it is going to do great things.

Rather, I am advising caution. Rational investment analysis never goes out of style. A sober mind always does better on Wall Street than one that is intoxicated with exuberance.

Why are AI stocks overvalued: The reason is simple: P/E ratios are out of whack.

A quick tutorial on the P/E ratio is in order:

P/E stands for price/earnings. The P/E ratio is the cornerstone of stock market investing. If you only know one thing about a stock, you should know it’s P/E ratio. Professional investors will never buy a stock based solely on its P/E ratio- but they will certainly eliminate a stock from consideration if the P/E ratio is too high.