The AI stock rally has continued at a torrid pace. Many companies in this sector have cruised to new all-time highs almost daily in recent months. As an investor, it’s natural to feel some skepticism and ask how much longer this momentum can last. We’ve seen bubbles inflate and pop across various sectors over the past two decades. The meteoric rise of certain AI stocks, fueled heavily by hype and future potential rather than current fundamentals, looks eerily similar.
Could these high-flying AI stocks still climb 30%, 50%, or even 100% from here? Perhaps. But the underlying risk with many of these names is undeniable. Fundamentals no longer seem to matter when these stocks get caught in a frenzy of FOMO, with retail and institutional investors alike clamoring to avoid missing out. “It’s different this time” becomes the justification for chasing gains at any cost. That said, history cautions us: when greed supersedes rationality, the party usually never ends well.
I’m trying not to fear monger. But today’s valuations strain credibility for certain AI names. Rather than play hot potato, investors would be wise to lock in profits on some over-extended stocks and rotate into more reasonably-priced options with more upside. With that in mind, here are two AI stocks to sell and two to consider buying right now.
AI Stocks to Sell: Nvidia (NVDA)
Nvidia (NASDAQ:NVDA) has been on an epic tear these past few weeks, smashing top and bottom-line estimates in its latest earnings report. Revenue beat by 7.6% and earnings per share by an even more impressive 11.3% margin. These stellar results were driven by big-time revenue growth for Nvidia’s best-in-class AI semiconductor technology.
Demand for its AI chips continues to accelerate. However, I have been vocally bearish on Nvidia since the summer of 2023, even as shares have doubled since. At nearly $800 per share and boasting a forward price-to-sales ratio approaching 18-times, NVDA stock looks dangerously overvalued.
Zooming out to 2034 expectations still equates to a steep ~7-times price-to-sales multiple. No doubt Nvidia’s profitability is solid. But I caution this is unlikely to persist long-term. The AI chip space is attracting fierce competition from players willing to spend big to catch up. And Nvidia’s chip customers have no allegiance – we saw a similar situation play out with Cisco (NASDAQ:CSCO) over two decades ago. High margins inevitably attract competitors who will eventually erode margins over time. Yet, NVDA stock trades at 3-times the valuation of chip manufacturing giant TSMC (NYSE:TSM), which I argue is unsustainable.
Forget AMD (NASDAQ:AMD) and Intel (NASDAQ:INTC). Remember, Amazon (NASDAQ:AMZN), Google (NASDAQ:GOOG, NASDAQ:GOOGL), Microsoft (NASDAQ:MSFT), and Meta (NASDAQ:META) account for 40% of Nvidia’s revenue. They all have their own in-house chips and have already deployed these in a limited capacity. Nvidia could squeeze out big margins on its AI chips in the near-term, but I really do not see that continuing over the long-run.
C3.ai (AI)
C3.ai (NYSE:AI) stock has jumped 40% in recent days on the coattails of NVDA’s earnings beat and its own better-than-expected results. However, I would caution against chasing this momentum. C3.ai remains deeply unprofitable by traditional metrics like net income, with no profits projected for years. It sports a dizzying 14-times price-to-sales multiple. That’s extremely rich for a company poised to grow revenue 20% annually, if we’re optimistic. Essentially, AI stock is priced like a high-growth SaaS disruptor, when its financial profile looks nothing like one.
Bull cases seem to hinge on AI’s intriguing technology and its big partnership with Baker Hughes (NASDAQ:BKR), but I don’t view these catalysts as enough to justify the stock’s current valuation. Plenty of companies boast cool tech without meriting a clearly inflated stock price. And reliance on one major customer is always risky. In my view, C3.ai would trade at a far, far lower multiple in any other industry.
AI Stocks to Buy: UiPath (PATH)
Unlike NVDA and AI, I’ve held a bullish view on UiPath (NYSE:PATH) for some time, especially after it declined to nearly $10 per share. Recently, PATH stock has been on a steady climb higher, but without the outsized volatility of some AI peers. Robotics-based process automation feels like an under-the-radar space, but the moat here is real. As software AI transforms white-collar industries, robotics could have similarly disruptive potential in blue-collar industries facing labor shortages.
UiPath predictably trades at a premium, but 10-times forward sales is a multiple that’s similar to certain AI stocks. And with solid profits already materializing, 20% revenue growth, and operating leverage still to come, I believe the premium is justified, if the company continues to execute quarter after quarter.
Competing RPA players are few. Thus, at the right price, PATH stock offers balanced exposure to automation advancements in the workplace. It can definitely trade lower in the near-term. However, the company did beat earnings per share expectations by a whopping 121% in its latest reported quarter, and by 30% before that. That could mean much stronger profits ahead, if the trend continues.
Synaptics (SYNA)
A lesser-known name, Synaptics (NASDAQ:SYNA) develops critical hardware components enabling AI capabilities in devices. These include DSP chips powering voice recognition, display drivers for VR/AR headsets, and more. I’m very bullish on both niches, as AI voice matures from narrow utility today into applications powering a seamless user experience over the next decade. And immersive technologies like virtual reality and augmented reality are poised for growth.
Now, Synaptics does face a transitional year in 2024. But the company also boasts an impressive rebound story looking forward to 2025. Analysts expect the company’s earnings per share growth to surge 110%, driven by 23% revenue growth. This highlights Synaptics’ leverage to the rising adoption of AI voice interfaces and VR/AR hardware. At 22-times forward earnings and 3.3-times forward sales, SYNA stock trades at healthy multiples, but multiples that are clearly rooted in strong fundamentals. With critical capabilities in two surging spaces, I believe SYNA stock offers big upside with far less risk than some of its AI peers.
On the date of publication, Omor Ibne Ehsan did not hold (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.