Artificial intelligence stocks have enjoyed a stellar run in 2024, with valuations reaching new heights. However, a recent report from Citigroup throws a bucket of cold water on the party, suggesting investors may want to consider taking some profits off the table.
The report, led by strategist Drew Pettit, highlights the exceptional performance of AI-linked equities. Sentiment towards these companies is currently at its strongest point since 2019, fueled by optimism surrounding the transformative potential of artificial intelligence. Additionally, many AI firms are exceeding analyst expectations for free cash flow generation.
Despite these positive indicators, Citigroup believes historical trends suggest a potential correction on the horizon. The report emphasizes the importance of reviewing similar periods of rapid growth in the tech sector, particularly the dot-com bubble of the late 1990s. While the fundamentals of today's AI giants are arguably stronger than the internet companies of that era, the possibility of a valuation adjustment looms large.
Pettit and his team acknowledge the long-term growth prospects of artificial intelligence. However, they advocate for a more cautious approach in the near term. The analysts recommend that investors consider trimming their positions in some of the most overheated AI stocks, particularly those whose valuations seem disconnected from their current earnings potential.
This profit-taking strategy wouldn't necessarily signal a complete retreat from the AI sector. Investors could use the proceeds from selling some high-flying stocks to invest in more undervalued AI companies with promising futures. This approach would allow them to maintain exposure to the exciting world of artificial intelligence while mitigating potential risks associated with overvalued stocks.
Citigroup's report comes amid a broader debate about the sustainability of the AI rally. While some analysts remain bullish, others echo Citigroup's concerns about a potential bubble. As the year progresses, it will be interesting to see if the optimism surrounding AI translates into continued stock price growth or if profit-taking sets in, leading to a period of consolidation in the market.