Artificial intelligence (AI) has supercharged many tech stocks, such as Nvidia (NVDA 0.43%), and significantly bolstered their long-term growth opportunities. For investors, that has resulted in some incredibly impressive gains. Even the recent SpaceX IPO is benefiting from AI-fueled hype, because while it's often referred to as a rocket company, it estimates that the vast majority of its total addressable market will come from AI.
It's been all about AI in the stock market for the past few years. And while that does represent a huge opportunity, there's also the danger that expectations may have become unrealistic. If that's the case, there could be a big reckoning ahead. OpenAI's CEO, Sam Altman, issued a warning back in 2024 about AI amid the development of ChatGPT, which I believe could prove to be prophetic.
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Investors may be setting themselves up for disappointment
ChatGPT and other AI chatbots have made many tasks easier for both businesses and individuals. They can generate images and draft professional responses for emails and, through agentic AI, can even handle multi-step processes that in the past could have taken hours.
But in 2024, Altman made a remark that I think warrants much more attention, and it may foreshadow what's to come for AI investments. When referring to the development of the next version of ChatGPT, Altman said people were "begging to be disappointed" because of their inflated expectations for what the chatbot should be able to do.
While Altman remains excited about what AI can do for humanity in the future, those are four words that I believe investors should always keep in mind when investing in stocks because of their AI-related opportunities.
AI stocks have some incredible growth prospects baked into their valuations
Many AI-exposed stocks, including SpaceX, Nvidia, and others, trade at high valuations, but this is often overlooked because of what the future is expected to be for these companies.
But what if they fall short of those expectations? That's not something the market seems willing to consider at this point, given how hot it's been in recent years and how expensive many AI-exposed stocks have become. And yet, it's a worthwhile question to ask because it uncovers the risks many of these stocks pose. Nvidia, for instance, looks cheap based on its price-to-earnings-growth ratio of just 0.63, which would suggest it's still an incredible bargain. But that's based on its expected growth over the next five years.
NASDAQ: NVDA
Key Data Points
Things can change quickly, especially in tech, and investors shouldn't forget that. Buying stocks based on assumptions of future growth can be dangerous and lead to disastrous results later. Now may be a good time to consider focusing on more value-oriented stocks with more predictable business models; going too heavily on AI stocks could add significant risk to your portfolio.
