Stocks to sell

Beware the Bubble: 3 Overheated AI Stocks to Sell Before It’s Too Late

Stock markets have printed new record highs on the back of enthusiasm around artificial intelligence (AI), with the potential of uncovering overheated AI stocks to sell improving day by day. Of course, the resilience of the United States economy has contributed to the growth seen in certain AI stocks, like Nvidia. Moreover, expectations that the Fed will cut rates this year help sustain the thesis that the market has further upside.

However, even the Fed is starting to be concerned over AI gains, with overheated AI stocks to sell coming back into focus. Some warn that the AI boom is a bubble and point to overheated AI stocks to sell before it’s too late. Others go as far as to compare the current environment with the dot-com burst. In fact, one of the largest asset managers in the world recently cautioned that the AI bubble could be even larger than the tech bubble of the 1990s.

Adding to the rhetoric around the AI bubble, some analysts point to ever-growing valuations. With earnings struggling to keep pace, they believe that is a stark sign that enthusiasm for AI has surpassed reality. A minority even compiles lists of signs to identify when the bubble is about to break.

Stocks that keep seeing valuations rise could be considered overheated AI stocks to sell. When a stock’s price continues to grow faster than earnings, at some point, investors will realise it has become too expensive. This might prompt a sudden correction as the price adjusts to reality and aligns with the actual financial performance of the company rather than the hype around expectations.

With that in mind, let’s examine some overheated AI stocks to sell as they have extended their valuations into alarming territory.

Super Micro Computer (SMCI)

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The server manufacturer Super Micro Computer (NASDAQ:SMCI) has seen its stock price increase substantially over the last two years. Thanks to a growing demand for AI servers, its value has risen more than 20 times over the past two years. The company recently experienced a further boost after it announced joining the S&P 500 index, widening the pool of potential investors able to purchase the stock.

However, SMCI trades on a price-to-earnings (P/E) ratio of 70.9 times, well above the technology sector average of 44.6 times—already considered inflated. Given the bubble-like growth it has seen over a short period, some correction in its share price would not be entirely surprising.

With valuations exceeding potential fundamentals in the near term, SMCI could be considered among the overheated AI stocks to sell.​

MicroStrategy (MSTR)

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MicroStrategy (NASDAQ:MSTR) is in the business of providing cutting-edge AI innovation and enterprise analytics. It is well-known for having made notable investments in Bitcoin (BTC-USD), becoming BTC’s largest publicly traded institutional holder. Consequently, its share price performance often reflects the cryptocurrency market.

When Bitcoin rose to nearly $64,000 last week, MicroStrategy’s most recent acquisition of $6.1 billion at an average price of $31,544 had proved worthwhile. However, cryptocurrencies are volatile by nature, and the company must continue satisfying investors by generating regular and not periodical income.

MSTR currently trades at a P/E ratio of 40.8 times its earnings, which is partially lacking. However, CEO Michael Sailor’s recent sale of shares following the Chairman’s 5,000 share divestment could be signalling trouble. On top of that, earlier in the month, the company disclosed that it remains unprofitable, and its revenue decreased compared to the equivalent period last year.​ As a result, it makes a good candidate for our list of overheated AI stocks to sell.

SoundHound (SOUN)

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Soundhound AI (NASDAQ:SOUN) has received a significant boost and market attention after Nvidia disclosed a stake in the company. There was considerable anticipation ahead of the company’s earnings last week to assess whether the numbers substantiated the stock’s valuation. Although the company performed better than last year, it did not meet expectations.

The surge of its stock price over the last month set unrealistically high benchmarks for the company. However, management remains optimistic about its medium to long-term prospects. Nevertheless, the stock price may adjust somewhat to a more reasonable price in the interim., make it the third pick of overheated AI stocks to sell before it’s too late.

Disclaimer:On the date of publication, Stavros Tousios 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.

Stavros Tousios, MBA, is the founder and chief analyst at Markets Untold. With expertise in FX, macros, equity analysis, and investment advisory, Stavros delivers investors strategic guidance and valuable insights.

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