Investing in AI stocks has become the latest trend in the investment world, but it is not for everyone. Many investors, including myself, have been burned by hot trends that resulted in significant losses. Therefore, before you consider investing in AI stocks, it is essential to consider a few aspects.
Firstly, the valuation of a company plays a crucial role because even the best companies bought at the wrong price could result in a disaster. Therefore, it is vital to ask yourself, What kind of growth must this company sustain for this valuation to make sense? For instance, when it comes to the popular AI stock Nvidia, it is trading higher than most stocks’ price-to-earnings ratio at 40 times sales. Even if Nvidia doubles its revenue level, the P/E ratio remains at an expensive figure of 53.
Secondly, it is crucial to consider if investing in AI stocks fits your current situation. If you have a long investment horizon, investing in a volatile industry like AI may work for you. However, it may not be the right decision for someone nearing retirement or already retired. Moreover, there’s no guarantee of AI’s overall impact, and its hype cycle is still on the roller coaster up to the peak of inflated expectations.
Lastly, it is essential to consider if AI is a game-changer or just a temporary trend. Many companies discussed AI, but nothing ever came to fruition, like the metaverse or blockchain. On the other hand, companies like CrowdStrike, Palantir, Alphabet, and Meta Platforms use AI at their core to power machine learning programs that can process massive amounts of data to perform tasks without human intervention.
Asking yourself these three questions before investing in AI stocks can help weed out imposters and leave you with genuinely good AI investments. Therefore, it is crucial to invest in AI stocks with caution and consider multiple factors before deciding to invest in them.
