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These stocks have been hot buys in large part due to expectations of continued strong growth driven by artificial intelligence (AI).
Nvidia, a leading chipmaker with a $5.5 trillion market cap, has seen tremendous growth due to AI demand for its chips. However, its high valuation (forward P/E of just under 25) heavily relies on expectations of continued strong AI growth. A slowdown in AI development could drastically reduce its growth rate, lead to revised earnings estimates, and make the stock appear significantly more expensive, posing a risk to investors who have priced in sky-high expectations.
Micron Technology, with a very low forward P/E of seven, appears cheap, but its recent surge (over 550% in 12 months) is largely due to a shortage of memory products driven by AI demand. If AI development slows, this shortage could quickly turn into a glut, leading to reduced demand for chips and related AI infrastructure. This shift would unravel Micron's growth story and could make its stock vulnerable to a significant sell-off.
Palantir Technologies is a stock with a high valuation (forward P/E of 85) driven by expectations of incredible growth and insatiable demand for its AI, as often boasted by CEO Alex Karp. While its strong government contracts might offer some protection, any reduction in corporate AI spending could expose cracks in its growth rate. Given its 'priced for perfection' valuation, even minor signs of weakness could significantly derail the stock and be detrimental to shareholders.