AI Stocks Are Not Overvalued: Analyzing the Numbers

After a surge in the stocks of companies most exposed to artificial intelligence (AI), skeptics are questioning whether the market is in a bubble. While the gains appear excessive, several factors indicate this overly hyperbolic term may be inappropriate. For one, valuations are up but remain below bubble levels with the NASDAQ Composite’s forward price/earnings multiple at around 27 times, well shy of the 35 times reached before the pandemic-induced bubble burst in 2020 or the 60 times seen at the peak of the dot-com bubble in early 2000. Furthermore, the multiples appear fundamentally justified as investors largely pay 1.5 times the earnings growth rate, compared to the S&P 500’s 2 times. Analysts forecast annualised earnings-per-share growth of close to 18% for the NASDAQ, implying a PEG ratio of 1.5, which is not high relative to the above-average growth.