Stop me if you’ve heard this before – artificial intelligence (AI) is going to change the world, and some companies are going to make a lot of money from it.
If you’ve spoken to friends, family, or co-workers, or read the news or watched any financial media this year, then you know what I’m talking about.
It’s a topic that we’ve been pounding the table on for nearly a decade at Palm Beach Research Group. All the way back to when Daily editor Teeka Tiwari introduced his readers to Nvidia in 2015.
However, with the launch of ChatGPT, AI has gone mainstream this year. It’s all investors have wanted to focus on.
Nearly all of the S&P 500’s 14.7% rise this year has come from the technology sector.
Companies like Adobe, Salesforce, and Nvidia have seen their shares explode 53%, 56%, and 198%, respectively, since January. Strip out the tech sector, and the index has only gained 1.7% this year.
But the reality is, the era where AI gains are easy to come by is over.
If you’re considering jumping into this trend now, I urge you to exercise caution… Because AI stocks are currently priced for perfection.
In today’s essay, I’ll show you why it’s dangerous to invest in AI stocks right now. I’ll also share an idea that has 100x more upside potential than today’s most popular AI stocks.
Not a Perfect Match
Intel is a prime example of what we highlighted above. Back in the late 1990s, the company was on top of the world.
It was by far the largest semiconductor maker globally. More than 85% of personal computers sold ran on Intel chips.
Investors’ fervor led to a surge in Intel’s price…
By Intel’s peak in 2000, its shares had soared by 250% over the previous two years. It was the fifth-most valuable company in the world, with a market cap of $275 billion.
But it was trading at a massive 63x price-to-earnings multiple.
[The P/E ratio, or price-to-earnings ratio, measures how much people are willing to pay for $1 of earnings.]
If you invested in Intel at that time, 23 years ago, you would be down 56% on your position today.
For investors who bought in 2000… That’s got to sting.
Especially since you would’ve gotten the story right.
Intel was a key beneficiary of the rise of personal computers. And it remains the leading manufacturer of computer chips.
Plus, it became a leader in another multi-billion-dollar market: Seventy percent of all data center computers run on Intel chips.
The company has doubled in size, and it paid out $16.53 in dividends per share since 2000.
That does little to soothe your pain, though, if you bought Intel when it was priced for perfection.
Intel isn’t the only tech company that soared to these high valuations during the dot-com boom. Oracle, Cisco, Qualcomm, and Yahoo all sported P/E valuations at over 150x in 2000.
As you probably guessed, the problem with purchasing companies at these eye-watering prices is the possibility that they don’t grow as fast as long-term forecasts are projecting.
If you were to purchase shares of a company at over a 100x P/E ratio, one of two things could happen.
- The company meets everyone’s expectations and grows into its valuation.
Let’s be conservative and assume, with all the rises and falls, the company manages to grow by 13% a year over the next 10 years. That’s in line with the long-term average of the market overall.
For the stock to return to a normal valuation of 20x P/E, its earnings per share (EPS) would have to grow by 33% a year over the next decade. That’s an astounding 17x growth in EPS over 10 years.
- The company fails to meet those lofty expectations.
Intel is a case study in what happens then.
The company hit a wall in the technological advancements of its microprocessors. Competitors like AMD, Nvidia, and Samsung began to take market share.
Even with its persistent dominance, Intel has only grown its earnings by 12% per year since 2000: a fine, but relatively disappointing, 3x growth.
As a result, Intel failed to grow into its valuation. That means its earnings never grew to where they needed to be to justify Intel shares reaching and surpassing its dot-com-bubble peak.
That’s why it’s important to exercise extreme caution when investing in a company whose valuation is soaring off of future expectations.
Adobe, Salesforce, and Nvidia currently trade at P/E multiples of 48x, 105x, and 211x. That means you’re paying $48, $105, and $211 for every $1 of earnings.
That’s insane. Especially when the median P/E ratio of non-tech companies in the S&P 500 is 19x.
There’s no doubt that these three companies will directly benefit from the AI trend. However, if any of them stray from their lofty forecasts, you’ll regret buying at these levels.
A Better Opportunity
Now, I’m not saying the AI trend is a flash in the pan. It’s the biggest megatrend of our generation.
Consultant firm PwC Global estimates it will create $15.7 trillion in new wealth.
We’ve been well positioned to capture that within The Palm Beach Letter for years now. In fact, we’re big fans of Nvidia, and we’re up 625% on our position since we recommended it in December 2020 – and over 5,000% since Teeka first recommended it to his subscribers in 2015.
However, as I said above, it’s a risky moment to double down on many AI stocks due to their sky-high valuations.
But there are pockets of great opportunity out there to get exposure to the AI megatrend without taking on the same level of risk.
Recently, Teeka laid out the case for a little-known crypto project that he calls his #1 coin for the AI boom.
It’s a project that’s solving the main problem in the advancement of AI – the need for more computing power.
And best of all, right now it trades for around $1. That means you can get in on the ground floor.
Based on our research, this project has at least 100x more upside potential than popular AI stocks at current valuations.
This is why we love crypto to play these types of massive trends… You don’t need to bet a lot to make a lot. Just a tiny grubstake could turn into a seven-figure payout.
With a risk-reward set up like that, you can potentially change your lifestyle investing in the AI trend without putting your current lifestyle at risk.
Regards,
Michael Gross
Analyst, Palm Beach Daily