Nvidia, Micron, Broadcom have cheap valuations despite big gains, and one Google decision could explain why
Cheap valuations from some of the AI industry’s biggest names may seem like a bargain, but according to one market research firm, Business ContentThese could be a warning that investors are losing faith in the data center boom powering the rise of artificial intelligence.
Valuation paradox: Cheap is not safe
Tom Essaye, founder of Sevens Report Research, wrote in a note Wednesday: Business ContentUnusually low valuations in leading AI stocks may reflect growing skepticism rather than opportunity.
Investors often give higher valuations to growth companies because of their future earnings.
The point emphasized by Essaye is as follows: Business Content, The flip side is that when AI stocks trade cheaply despite strong growth narratives, it indicates the market has doubts that its earnings potential can be realized.
Four stocks, one signal: the numbers
Business ContentThe report cited four examples to illustrate this model.
Nvidia is up 44 percent in the last 12 months but trades at 21 times forward earnings.
Micron Technology is up 770 percent but trades at just 10 times forward earnings.
Broadcom is trading at 24 times forward earnings, up 51 percent.
SanDisk is up a remarkable 4,490 percent over the same period, but its forward earnings multiple stands at just 14x.
For context, the S&P 500 as a whole is trading at a forward price-to-earnings ratio of 21.5; This means that many of the AI-related names are valued more conservatively than the broader market, despite their big gains.
Canceled orders: domino alert
Essaye warned that the consequences of pulling back on AI spending would be quickly reflected in the supply chain. “Think of it this way: GOOGL is canceling building 10 data centers (to use one as an example) because it would cost too much money and there would be no return,” he wrote.
“This will result in massive order cancellations at NVDA, MU, AVGO, SNDK, etc. because no one needs the chips, network, memory or processing power,” he added.
Oracle’s slide: an early signal
As an example of investor unease already emerging, Essaye pointed to Oracle, whose shares have fallen nearly 25 percent since early June as the company continues to pour money into artificial intelligence infrastructure.
The decline in his reading shows how quickly the market can punish heavy AI capital expenditures if returns are not tracked quickly enough.
Dot-com echoes: a cautious comparison
Essaye was cautious about seeing the market top but said the dynamic at play had clear historical precedent in the bubble that burst in 2000. “To be fair, this fear has been around for a few months and it’s just not emerging yet. But it’s not without precedent because that’s exactly how the dotcom bubble burst,” he said.
“As people were connecting to the Internet, their connections were not becoming profitable as quickly as everyone assumed,” he continued. “Construction has stopped because of this.”
