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I made the case last week for buying NVIDIA even at these prices but with the caveat that it was too expensive for this value investor. Shares will no doubt be higher in 10-years but only the most determined growth investor will have the nerves to hold on through what is likely a painful crash from bubble-territory. This week, I want to help you stay invested in the AI-theme even if it’s not in shares of the market darling NVDA with a valuation of 11 AI-related stocks.
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There is little doubt AI will revolutionize our lives and I don’t think you should avoid the theme just because the market darling is too expensive. That’s why I went looking through the AI stocks to find those trading less expensively than NVDA. I’ll highlight the top five below then show you the PEG ratio for all 14 AI stocks.
Understand two things though, first is that AI stocks are definitely in a bubble. That’s not saying the next 5-10 years these stocks won’t be higher but they could very easily be much lower over the next year. We can talk valuations all day but the fact is, when EVERYONE is talking about a theme, then it’s a good guess that stocks have approached bubble territory.
The solution to this, if you’re still going to be investing in AI stocks now, is to plan on regularly investing more in the stocks every few months. That way, if or when the bubble pops, you’ll be able to lower your average cost per share and still be in the stock when it takes off again.
The other thing you need to understand, something we talked about last week, is that the PEG ratio is very much dependent on those estimates for earnings growth…and Wall Street analysts making those estimates are just as prone to bubbles as the rest of us. Case in point, the average estimated earnings growth through 2025 for NVDA last week was 178% from $3.34 to $9.34 per share earnings. In one week, that average estimate has shot up to 210% growth with the forecast now for $10.37 per share earnings. What this means is, to use the PEG ratio, you have to be able to either trust estimates for earnings growth or use your own estimates.
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Joseph Hogue, CFA spent nearly a decade as an investment analyst for institutional firms and banks. He now helps people understand their financial lives through dividend stocks, investing and ways to make more money. He has appeared on Bloomberg and on sites like CNBC and Morningstar. He holds the Chartered Financial Analyst (CFA) designation and is a veteran of the Marine Corps.
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