As the days pass and the market slowdown continues, many analysts are wondering if the artificial intelligence (AI) bubble has finally popped. From a logical perspective, several companies have disproportionately benefited from the AI moniker and related marketing. However, a deeper question remains, even as price corrections sweep across the AI giants and their affiliates. What companies currently offer overvalued tech stocks to sell if the bubble bursts more dramatically than expected?
This question stems from the fundamental misunderstanding many retail investors have about what drives the value of AI applications. That’s because many people today still misconceive AI as a truly intelligent construct capable of “thinking”. The current reality is that all commercially available AIs are highly customized algorithms capable of calculating and aggregating the probability of data relationships. As such, investors should be on the lookout for companies that have overly touted AI as a revenue driver.
Arm Holdings (ARM)
With the sensational interest in AI over the last 12 months, Arm Holdings’ (NASDAQ:ARM) value has risen by 50% since debuting on September 14, 2023. At an initial public offering price of $51.00 per share, the company’s opening value sat at $54.5 billion. This makes it the largest IPO since 2021, and one in which several investors have ridden the AI hype to generous returns in the last six months.
ARM stock has returned 39% year-to-date, but investors might want to consider whether or not this is a fair valuation. For example, ARM does not manufacture anything, rather it is an engineering company that designs and licenses intellectual property. As such, it risks losing a competitive edge should other companies figure out how to reverse engineer its products.
Moreover, ARM’s highly specialized central processing unit designs rely on substantial demand to effectively drive licensing revenue. Thus, the company is at the mercy of the AI adoption rush, which could slow and damage shareholder value.
Informatica (INFA)
A mid-sized fish in a colossal pond, Informatica (NYSE:INFA) has strategically navigated the new AI landscape to stunning gains in the last year. Up over 100% in 12 months, INFA stock’s rapid growth mirrors that of a tech company disrupting the status quo. However, therein lies the issue, as Informatica is not an exceptionally innovative company among cloud service providers.
Despite this, the company’s overall financial performance has been exceptional thanks to turning a profit in Q3 of 2023. However, some analysts argue the company’s base intrinsic value should be around $26.72. This suggests that the current trading price of $31.39 is overvalued by 13%. On top of this debate, Salesforce’s (NYSE:CRM) failed acquisition attempt has lowered INFA’s value slightly in the past week.
Ultimately, the company has been able to successfully ride a substantial adoption wave. Yet, should the generous leaps in revenue slow, the stock could stumble.
Super Micro Computer (SMCI)
Another stunning performer on the AI stage, Super Micro Computer (NASDAQ:SMCI) deserves a little more scrutiny than it has gotten. Aside from scandals involving compromised products and the sale of embargoed technologies to Iran, the company’s products may not justify its valuation. This issue stems from its main revenue drivers being information technology hardware and the software to optimize its use.
On paper, this seems like a thrilling combination, as it has allowed SMCI to tailor several applications to any customer. The reality is, however, that scalability could suffer should an AI bubble burst and temporarily impede customer interest in acquisition. Mix in the potential risk of future morally gray business decisions from leadership, and SMCI’s sticker price might need a second look.
Overall, the company’s healthy financial performance protects it, though its price-to-earnings ratio of 59.55x sits well above the industry average. Therefore, SMCI could fall into the category of overvalued tech stocks to sell.
On the date of publication, Viktor Zarev 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.