Many wonder if it still makes sense to take part in the exponential growth of AI (artificial intelligence) securities on the stock market. Here are some important considerations to make.
2023 marked an epochal turning point for the artificial intelligence sector, attracting significant interest and attention from investors.
The growing popularity of this trend has been reflected in a notable increase in AI-related stocks on the stock market. Many of these companies have experienced extraordinary growth, with earnings vastly exceeding expectations. Some stocks even showed three-digit gains, generating unprecedented enthusiasm among investors.
However, due to such rapid growth, there has been some concern that some stocks in the artificial intelligence space could be subject to a premature financial bubble. Investors and industry insiders questioned the sustainability of this frantic bull run and the possibility that the bubble could burst in the near future, leading to negative consequences for US stock exchanges.
This concern immediately evokes memories of the historic dot-com crisis of the 2000s, during which many technology companies, mainly concentrated in the new technology and Internet sectors, suffered a dramatic collapse. The bursting of the dot-com bubble caused a wave of corporate bankruptcies and a crash in stock prices, generating significant instability in the financial market.
Although the dot-com crisis may seem like a distant event, financial markets over the last 20 years have shown a certain cycle characterized by periods of exceptional growth, followed by phases of depression and, finally, a steady recovery for companies that demonstrate real value. This cycle of ups and downs has led many experts to hypothesize a similar situation in the near future, as the market regulates itself in a sort of natural selection which tends to eliminate less solid companies and promote those that demonstrate real adaptability and success.
So is AI in a financial bubble? A look at stocks and the value of the reference stock indexes.
Is the AI industry in a financial bubble?
In simple terms, a financial bubble is a significant increase in the prices of certain assets, such as shares, real estate, or consumer goods, beyond their intrinsic value. During a bubble, investors are driven by high enthusiasm and expectations of high profits to buy such assets, further fueling higher prices. Basically, a financial bubble occurs when there is a mismatch between a company’s intrinsic value and its financial value.
Take for example the company NVIDIA, which is a case study analyzed by experts in the context of artificial intelligence. Growth expectations for this company’s earnings and, consequently, earnings per share (EPS) have reached astronomical figures, with a price to earnings (P/E) ratio close to 200. This value represents multiple significantly off-market valuations. The market has probably discounted expectations for corporate profit growth exponentially in the coming years, especially after the company reported positive results in the first quarter of 2023, despite forecasts of economic contraction in the United States.
However, according to data provided by Factset, the lowest point in the financial results of the companies that make up the S&P 500 index is expected to be reached at the end of the second quarter. Therefore, experts say, NVIDIA investors could experience a negative reaction following the release of the financial data for the next quarter.
Which ETF to monitor to follow the dynamics regarding the artificial intelligence trend?
This analysis underlines the importance of carefully evaluating the relationship between the intrinsic value of a company and the financial valuation attributed to it by the market. Expectations and forecasts play a significant role in determining asset prices, but it is critical to assess whether those valuations are sustainable over the long term. Investors must be aware of possible market corrections and make decisions based on an accurate assessment of the fundamentals of companies, in order to avoid the negative consequences of a possible financial bubble.
To this end, a good strategy for tracking the performance of AI stocks could be to track certain active, passive, or index funds. ETFs (Exchange Traded Funds) are gaining popularity among investors, regardless of the quality of the fund itself. In this context, it might be interesting to take as a reference the performance of Xtrackers Artificial Intelligence and Big Data, considered one of the most popular passive funds on the market.
Within this ETF, NVIDIA CORP represents only around 8% of the total fund composition. This means that the effect of the alleged "bubble" appears less evident, with annual performance currently around 38%. Tracking the performance of such a fund can provide investors with a bigger picture and a diversified perspective on the AI industry, potentially reducing exposure to the negative effects of a specific financial bubble.
Original article published on Money.it Italy 2023-07-01 12:11:00. Original title: I titoli AI sono davvero fuori mercato? Uno sguardo a questo ETF
