Why the AI Stock Bubble Could Expand Further: Insights from Jefferies
According to Jefferies, the surge in AI stocks shows no signs of waning anytime soon.
The financial powerhouse highlighted that its portfolio of 27 major AI stocks has collectively surged by an astonishing $10 trillion in value since the inception of ChatGPT in November 2022, with an average gain of 127% across these shares.
Analyst Edison Lee, in a recent analysis, predicted that rather than deflating, the AI stock bubble is poised to grow larger. Lee underscored that the cumulative rise in AI stocks now rivals the combined gross domestic products of major economies like Japan, India, and Brazil.
Lee categorized the AI basket into four key segments. These include companies involved in chip design, such as Nvidia, cloud service providers like Microsoft, Amazon.com, and Alphabet, chip foundries such as TSMC, and manufacturers of capital equipment for chip producers, including ASML. He articulated reasons why investor enthusiasm for these stocks remains robust.
Firstly, Lee pointed to the high certainty surrounding continued investments in AI infrastructure throughout this year and the next, which bodes well for firms engaged in chip design, semiconductor manufacturing, and related capital equipment production.
Secondly, Lee highlighted how the stock market is rewarding large customers of Nvidia for their substantial investments in AI chips, a dynamic that benefits cloud service providers significantly.
Thirdly, Lee noted that major cloud-service companies are sitting on a substantial cash reserve totaling $108 billion. This liquidity affords them significant flexibility to continue pouring resources into AI advancements.
Lastly, Lee emphasized that the current valuations of AI stocks, trading at an average of 28 times the consensus estimates for their 2025 earnings, are relatively reasonable compared to the excessive valuations witnessed during the dot-com bubble.
Lee elaborated, stating, “The equity market near term has created a self-reinforcing cycle in AI,” indicating a positive feedback loop currently driving the sector’s growth.
However, Lee cautioned that the future outlook for AI stocks might face scrutiny starting mid-2025. Investors are expected to increasingly demand clearer insights into the monetization strategies and return on investment from these companies.
“We believe investors will start asking these companies much harder questions in mid-2025 about monetization roadmap and ROI,” Lee remarked, suggesting a potential inflection point in investor sentiment toward AI stocks.
As Jefferies continues to monitor the evolving landscape of AI investments, the firm remains optimistic about the sector’s growth prospects in the near term, while advising vigilance as the market dynamics evolve.