On July 24, the stock market showed its first signs of instability this year. The Nasdaq composite dipped 3.6% in one day due to a broad selloff of the tech industry. This type of investor behavior was likely due to some form of institutional, advanced knowledge or realization that the broader stock market and tech sector may truly be overvalued. As a result, a few major artificial intelligence stocks stumbled slightly from the reminder that the rally experienced over the last year in the stock market may not be sustainable.
As such, investors may want to consider exiting their positions in overvalued AI stocks by the end of this year or even sooner. That’s because pairing the current instability of the U.S. presidential election with the broader issues of inflation and the expensive housing market could lead to a severe market crash in the near term.
Nvidia (NVDA)
There has never been a more opportune moment to sell Nvidia (NASDAQ:NVDA) stock. This recommendation comes due to its likely overvaluation and deep integration with the broader tech economy. Nvidia’s expertise in designing and producing graphics processing units and data center components has positioned it as a key player in the ongoing artificial intelligence (AI) boom.
Nvidia’s influence extends beyond its substantial market capitalization, impacting the Nasdaq and S&P 500 daily. However, stock trends are cyclical, and even NVDA will eventually face a correction. Selling now presents a lucrative opportunity to buy back in after the anticipated dip, which is a steady strategy with the cyclical hype AI stocks face.
Ultimately, buying the dip on NVDA would be a strategic move to maximize profits while reducing the average cost per share. Even if you sell at its peak now, the stock will likely exceed this high point after the next dip.
Adobe (ADBE)
With the introduction of OpenAI’s new DALL-E and SORA models, Adobe (NASDAQ:ADBE) faces significant challenges from AI advancements. Additionally, the company risks overvaluation due to its own AI initiatives.
The rapid development of AI software could render many of Adobe’s video and photo editing products obsolete, potentially shrinking its customer base. AI-generated photos and videos may attract potential stock footage customers away from Adobe.
Adobe has attempted to leverage AI to its advantage with features like Generative Fill in its Adobe Firefly software. These innovations have driven the company’s value up in recent months. However, it remains to be seen if these AI features will prove to be the value drivers Adobe claims. Currently, with a P/E ratio of 49.39x and the stock over the $500 mark, Adobe appears somewhat overpriced and would be worth getting out of.
Arista Networks (ANET)
Up an impressive 94% over the last 12 months, Arista Networks (NYSE:ANET) is at a point where investors might consider taking profits. In late February, I recommended ANET as a strong buy, anticipating that AI-related services would propel its growth. If you followed that advice, you’d be enjoying a solid 30% gain today, which is substantial for a stock intended for long-term investment.
However, five months later, it appears that AI hype may have driven ANET stock too high too quickly. With a price-to-earnings ratio of 43.25x, the stock is starting to look expensive. Considering the broader economic outlook and the data center industry’s future, a price correction for ANET seems likely.
Therefore, it may be wise for investors to lock in their profits now. While the stock could continue to rise, a broader market correction, which is overdue, could bring ANET down as well. Taking profits now allows for a strategic re-entry after a potential dip, maximizing long-term gains.
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.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.