Has Artificial Intelligence Fuelled a Big Bubble in Tech?
That’s the big question, according to managing partner at Deepwater Asset management Gene Munster. The revolutionary technology has been the catalyst behind two years of blockbuster gains in the equity markets. With major market indices trading near all-time highs, overstretched valuations are increasingly sending jitters in the investment community.
Nothing has been more significant than the emergence of artificial intelligence (AI). Even though the stock market has been driven by various factors, such as Donald Trump's victory in November, stock-split euphoria, dovish Fed policy, and better-than-expected earnings, AI has triggered eye-watering valuations. Nevertheless, a potential correction from current highs is on the horizon.
"I agree that Nvidia will have a day of reckoning — and the chip stocks, the whole trade. And the question for us isn't, 'Will the bubble burst?' It's, 'How high will we go before the bursting of the bubble?' Munster said.
While the overall market has pulled back significantly since peaking late last year, Munster insists there are another two years of solid gains before a potential bubble burst. According to the tech analyst, the bubble burst could result in a 30% decline in the tech-heavy index NASDAQ on the artificial intelligence hype running out.
Momentum in the equity market has subsided significantly in recent months, particularly among the big five tech stocks, and the market is signaling that the extraordinary growth and gains of 2024 will be difficult to replicate in 2025. Amid these growth concerns, investors should focus on AI plays trading at depressed valuations and companies backed by solid financials and long-term growth opportunities.
Analysts at Bank of America remain optimistic about the US software market outlook despite growth rates slowing down in recent months. While the sector grew by 59% in 2023, attributed to the AI frenzy, the growth rate slowed to 23% in 2024. However, given that multiples are still below expectations, there are still opportunities to unlock.
"Revenue multiples and growth expectations remain below 5-year median and pre-Covid levels,” the bank said in its Jan. 14 report, pointing to the potential of three secular themes for 2025: Agentic AI, growing enterprise IT budgets, and sustained cloud migration.
According to the bank, tech heavyweights spending heavily on AI and expanding on investments in 2025 is one factor that should fuel growth in the software sector. Likewise, the analysts expect sustained migration to the cloud to be a key driver of the software sector.
"Although we remain selective on small caps, we are bullish on the software sector for 2025, particularly in 2H, as accelerating secular tailwinds and easing cyclical headwinds converge," the firm added.
Our Methodology
For this article, we selected AI stocks by going through news articles, stock analysis, and press releases. These stocks are also popular among hedge funds.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
Cramer's Analysis of STMicroelectronics N.V. (STM): Stability in Uncertain Times
A worker assembling the inner circuitry of a semiconductor product.
STMicroelectronics N.V. (NYSE:STM) designs, develops, manufactures, and sells semiconductor products. It offers automotive integrated circuits (ICs), discrete and power transistor products and industrial application-specific integrated circuits (ASICs). On January 13, TD Cowen downgraded the stock to a Hold and cut the price target to $25 from $32. The cut came amid growing concerns about cyclical headwinds in the semiconductor industry.
Amid the cut, STMicroelectronics N.V. (NYSE:STM) has moved to strengthen its long-term prospect by unveiling the STM32N6 microcontroller for enhanced machine learning capabilities. The microcontroller is designed to deliver 600 times more machine-learning performance than current high-end STM32 MCUs, enabling advanced AI applications in consumer and industrial products. While the microcontroller has been available to select customers, it is now ready for high-volume production and use in consumer and industrial sectors.
Overall STM ranks 8th on our list of the AI stocks to watch ahead of potential market correction. While we acknowledge the potential of STM as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than STM but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
