The popularity of artificial intelligence has caused many companies’ stocks to “re-rate,” which means that buyers now value them higher than usual compared to their earnings.
However, that’s not quite true for a number of well-known companies. Advanced Micro Devices Inc. is the most notable exception. Analysts at JPMorgan recently looked at how the forward price-to-earnings ratios of some hot AI stocks compare to their standards over the last five years. AMD, with a multiple of 1.24%, is the only company in the sample whose multiple is smaller now than it was five years ago.
The number of shares that Nvidia Corp. NVDA 4.14% owns is also very low—it is only 3% above its five-year average.
It may depend on your view of the AI craze as a whole how you see these trends. AMD and Nvidia stock may not seem very expensive to people who see AI as a game-changing technology that will change the way things work for a long time.
The bank’s experts, led by Samik Chatterjee, look like they are interested in something else based on their list. They say that the “average valuation multiple of the sample of AI stocks is tracking at a level that is elevated relative to historical levels.”
The team at JPMorgan says that’s something to keep in mind as earnings season approaches. “Optical companies as a group have one of the highest premiums in the AI-led coverage group. While there is a good chance for revenue and EPS growth due to cloud companies’ continued strong spending, we see a high bar for the companies to meet in the near future,” the analysts wrote.
Even though JPMorgan rates Lumentum Holdings Inc. stock LITE -1.01% as overweight, the team put a negative trigger watch on the optical play in a Monday note because of the price. Analysts say that investors might not be able to get the information they need to back a view of $4 in earnings-per-share power in the near future.
Qualcomm Inc. QCOM -1.12% wasn’t one of the stocks that the valuation screener picked out, but JPMorgan is also keeping an eye on that overvalued name as a negative trigger. The trends in the smartphone market worry the experts that the March quarter will not go as planned.
On the other hand, positive event watches were put on shares of Dell Technologies Inc. (DELL -0.63%) and Amphenol Corp. (APH -0.87%).
JPMorgan thinks that Dell could have “a recovery in traditional infrastructure as well as robust ISG margins.” ISG margins are those for the company’s Infrastructure Solutions Group, which is made up of servers. These changes could make investors feel better about Dell’s stock, despite recent worries about AI server margins and how they might affect EPS growth.
When it comes to Amphenol, a company that makes connectors for wires and fibre optics, experts think that recent investor worries are overblown because the market growth seems to be strong.
