According to Goldman Sachs, investors are bullish on artificial intelligence in the long term, with over $1 trillion in spending projected by tech and utility firms. BlackRock researchers compared AI’s impact to the Industrial Revolution. Nvidia (NASDAQ:NVDA), leading the AI revolution, saw a 175% stock increase in 12 months. Tech and communication companies investing heavily in AI now constitute 44% of the S&P 500.
Christopher R. Jackson of UBS Wealth Management warned of potential risks due to the rapid rise in AI stocks, despite AI being a generational investment theme. He noted that investors might face turbulence if AI’s expected productivity gains are delayed or less impactful.
Jim Covello of Goldman Sachs expressed skepticism about generative AI’s future, noting its high costs and current limitations. He stated that for the significant investment to be justified, AI must solve complex problems that it isn’t yet capable of.
Currently, the tech sector faces a cold front as traders rotate out of overvalued tech stocks, seeking better opportunities in other sectors due to potential lower interest rates. High valuations are accepted until they aren’t, presenting opportunities for long-term investors. These three overvalued tech stocks should be out of your investor portfolio (if you have them).
Tesla (TSLA)
Still a volatile stock to own these days, Tesla (NASDAQ:TSLA) is continuously putting their investors in concern due to market competition. In 2024, Tesla faced challenges but saw a 30% rise in July, achieving a 1.2% year-to-date return. Long-term potential hinges on AI and tech advancements, though many projects are distant. A 34% monthly surge raised overbought concerns, leading analysts at UBS to downgrade it to sell due to valuation issues. Better entry points may arise later.
RJ Scaringe, CEO of EV competitor Rivian (NASDAQ:RIVN), says that Tesla’s market share decline is due to market saturation. Moreover, Tesla’s U.S. share fell below 50%, and profits fell 45% in the second quarter.
Tesla shares dropped 8% after again delaying is promised Robotaxi reveal. Declining EV sales and strong competition in China signal challenges ahead.
Arista Networks (ANET)
Silicon Valley-based Arista Networks (NYSE:ANET) is known for its cloud network services and Extensible Operating System. Its offerings are more efficient and scalable than those of its rivals. Arista also provides AI ethernet switching platforms and value-added software. Its AI network solutions have attracted investor attention, addressing a $60 billion total addressable market.
Arista Networks, a key player in cloud networking for large enterprises, appears attractive to investors. However, analysts like Rosenblatt argue the company’s AI opportunities are overestimated and its stock overpriced, predicting an imminent price correction.
The stock surged 51% in six months, prompting investors to consider taking profits. Initially recommended as a “strong buy” in February, the stock’s AI hype may have driven it too high too quickly. Its frothy price-to-earnings ratio suggests it might decline soon, especially if a market correction occurs. ANET shares, up 40% year-to-date, now trade at 41.5x forward earnings. Selling before next year would be wiser for investors.
Texas Instruments (TXN)
Texas Instruments (NASDAQ:TXN) sells analog semiconductors and embedded processors across healthcare, communications, automotive, industrial, and personal electronics sectors. Despite diversification, profits remain cyclical, with no net income growth since the third quarter of 2022. Earnings for the first quarter of this year showed a 16% revenue decline and a 35% net income drop year-over-year.
Free cash flow shrunk 79% year-over-year, dropping from $4.4 billion to $940 million, amid $3.7 billion in research and development and R&D and selling, general, and administrative expenses. With its current price above its 52-week average, TXN might be better revisited later as growth remains uncertain.
Texas Instruments reported second-quarter 2024 results that met expectations. Revenue was $3.82 billion, slightly above the guidance midpoint, and earnings per share were $1.22, aided by unanticipated items. Investors should watch the analog segment’s performance, free cash flow trends, strategic investments in advanced manufacturing, and disciplined capital allocation.
On the date of publication, Chris MacDonald 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.
On the date of publication, the responsible editor held a LONG position in NVDA.