Tom Essaye Says Cheap AI Stock Valuations Could Signal This

Tom Essaye, the founder of Sevens Report Research, said in a note on Wednesday that cheap AI stock valuations could signal that investors are growing fearful that the data center boom could come to a halt.

Typically, investors are willing to assign higher valuations to growth stocks because of their high future earnings potential. So the fact that some AI stock valuations are so low today means investors are skeptical that earnings potential will ever come to fruition, Essaye said.

“Think of it this way: GOOGL (to use one as an example) cancels building 10 data centers because it’s going to cost too much money and the return isn’t there,” he wrote. “That will result in massive order cancellations at NVDA, MU, AVGO, SNDK, etc., because no one needs the chips, networking, memory, or processor power,” he added.

A recent example of investor uneasiness, Essaye said, is the recent decline in Oracle stock. Shares of the company have tumbled about 25% since June 1 as it’s poured money into the AI buildout.

“To be fair, this fear has been around for several months, and it isn’t appearing yet. However, it’s not without precedent because this is exactly how the dotcom bubble burst,” he said.

“While people connected to the internet, their connection wasn’t nearly as profitable as quickly as everyone assumed,” Essaye continued. “Because of that, the buildout stopped.”