CNBC’s Jim Cramer said Wednesday that investors aren’t completely abandoning artificial intelligence and technology stocks, but rather expensive stocks.
“There’s no aversion to data center or AI stocks or even momentum plays. When bond yields rise, it’s just that money managers get out of expensive stocks and into cheaper ones,” the “Mad Money” host said.
Some of the market’s fastest-rising technology stocks have come under pressure in recent weeks, raising concerns that enthusiasm for AI is fading. Instead, Cramer said investors are simply becoming less willing to pay premium valuations for stocks that require near-perfect results to continue rising.
A common way to compare valuations is the forward price-to-earnings ratio, which is a company’s share price divided by its expected earnings per share over the next 12 months. The higher the multiple, the more an investor will pay for each dollar of expected return.
“Buyers aren’t running away from data centers or technology in general, they’re just afraid of the high multiples in tech stocks, because they have to be perfect,” he said.
Kramer pointed out that Mongo DBtrading at approximately 52 times forward 12-month earnings. The database software company’s stock fell about 13% Wednesday, despite announcing better-than-expected earnings and a positive outlook.
DellMeanwhile, the stock trades at around 16 times forward earnings, and has risen 16% after reporting strong earnings on Tuesday. For Cramer, this contrasting response shows investors are willing to continue buying technology and AI stocks if their valuations and fundamentals are attractive.
“It just so happens that a lot of the data center businesses have high multiples, but some of the non-data center businesses, like Dell, are also doing well,” Cramer said.
Nvidia Citing another example, he said: Despite being at the center of the AI boom, the chipmaker trades at about 17 times expected earnings over the next 12 months, significantly cheaper than many tech companies with slower growth.
Cramer said Nvidia’s relatively low multiple reflects skepticism about whether the company’s abnormal profit growth can continue as investors question the durability of data center spending. He said those concerns are misplaced and pointed to Dell’s performance as evidence that customers are starting to see meaningful returns from their AI investments.
“What is NVIDIA doing with such a low price-to-earnings ratio despite its incredible growth?” Cramer said.
For Kramer, the recent stock market decline isn’t proof that AI trading is doomed. He said investors still want AI and tech stocks, but they’re becoming more selective about the prices they’re willing to pay.
“We’re hearing that investors are fleeing artificial intelligence trading. Or they don’t want to own the technology anymore. Or data centers have become a nightmare. Or worst case scenario, momentum trading has collapsed,” he said. “These are all wrong. … They’re getting the symptoms right – these groups are really in decline – but they’re missing the real cause.”
