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AI: Overvalued or Worth the Hype?
Nvidia became the first company to cross the $4 trillion market valuation threshold earlier this summer.1 It took 30 years to become a $1 trillion company and only 2 more to become worth $4 trillion. Its meteoric rise is among the fastest in history. Though on its own level, Nvidia’s surge characterizes the rapid rise of tech companies amidst the AI boom that first ignited in earnest with the release of ChatGPT in 2022. Some argue that it’s too much too fast, blowing an historically large bubble of overvalued companies, while others argue the mania is justified with little risk of bursting. But which is it?
An overvalued stock is one that’s current price is not justified by its earnings outlook, especially when compared to its peers.2 Whether a company is over-, under-, or appropriately-valued can be measured by its price-to-earnings ratio (P/E). A P/E of 50, for example, means a stock is trading at a price 50 times its earnings and is considered by many to be overvalued. A company with a P/E of 10 might be considered undervalued.2
The U.S. tech industry’s P/E ratio ticked up to 49 recently, but have since trended back down into the 30s.3 This premium of price over earnings reflects the rampant enthusiasm about AI’s continued growth, but does not align with valuation as P/E ratios of big tech companies have outpaced their revenue projections. However, reductions in P/E ratios across the sector this year are hinting at a tendency toward moderating speculative bets on big tech.
Those who claim we’re in an AI bubble look at these elevated P/E ratios (and their rapid rise) as an indication that AI is overvalued and will soon inevitably level out as growth slows to more sustainable levels. In fact, one expert noted that the top 10 companies on the S&P 500 are more overvalued today than they were in the 1999 dot com bubble.3
The AI boom is often compared to the dot com bubble of the 1990s. In many ways, AI is following in the same pattern as other groundbreaking new technologies before it, like the internet. While disruptive tech tends to attract excitement and the capital investment to back it up, they don’t always result in a bursted bubble. To the global tech sector’s credit, earnings per share have gained roughly 400% from its peak before the great recession.4 Other sectors combined have only risen 25% since then.4
Bubble or not, there is no denying that the release of ChatGPT in 2022 was the starter pistol that kickstarted the current AI rat race. While growth in the sector prior to that milestone was largely aligned with reality, growth ever since veers into speculative territory. Today, the top 10 companies make up more than a third of total market share, making big tech far more dominant than in previous tech bubbles. Dominance, monopoly—whatever you want to call it—they tend not to last forever. Only 10% of Fortune 500 companies have remained on the list every year since 1955.4
History shows that where the winners of the newest tech boom have the furthest to fall, smaller companies poised to create value from the new technology have unlimited room to rise. TrueShares Technology, AI, and Deep Learning ETF (LRNZ) invests in the AI category killers of tomorrow, focused on the advantaged enablers and sophisticated users of today’s most innovative tech. Managed by an industry expert, LRNZ invested in Nvidia before it hit $1 trillion and before it was a household name. While the initial excitement might soon normalize, the potential of AI is only just getting started.
- https://www.nytimes.com/2025/07/10/technology/nvidia-4-trillion-market-value.html
- https://www.investopedia.com/terms/o/overvalued.asp
- https://www.ainvest.com/news/ai-bubble-ai-overvalued-today-market-2508/
- https://www.goldmansachs.com/insights/articles/ai-stocks-arent-in-a-bubble
For a full list of holdings, visit: https://www.true-shares.com/lrnz/
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