In his latest memo named “On Bubble Watch,” Howard Marks, co-founder and co-chairman of Oaktree Capital, highlighted several warning signs in the stock market, including high valuations that may lead to poor long-term returns or short-term declines. While not calling it a bubble, he pointed to the S&P 500’s elevated price-to-earnings ratio, which historically correlates with lower returns. Marks also expressed concerns over AI investments’ excessive enthusiasm and overconfidence in the Magnificent Seven tech stocks, which have contributed significantly to the S&P 500’s recent gains. Marks also wrote:
“…..when stocks rise too fast – out of proportion to the growth in the underlying companies’ earnings – they’re unlikely to keep on appreciating. Michael Cembalest has another chart that makes this point. It shows that prior to two years ago, there were only four times in the history of the S&P 500 when it returned 20% or more for two years in a row. In three of those four instances (a small sample, mind you), the index declined in the subsequent two-year period. (The exception was 1995-98, when the powerful TMT bubble caused the decline to be delayed until 2000, but then the index lost almost 40% in three years.)
In the last two years, it’s happened for the fifth time. The S&P 500 was up 26% in 2023 and 25% in 2024, for the best two-year stretch since 1997-98. That brings us to 2025. What lies ahead?
The cautionary signs today include these:
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the optimism that has prevailed in the markets since late 2022,
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the above average valuation on the S&P 500, and the fact that its stocks in most industrial groups sell at higher multiples than stocks in those industries in the rest of the world,
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the enthusiasm that is being applied to the new thing of AI, and perhaps the extension of that positive psychology to other high-tech areas,
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the implicit presumption that the top seven companies will continue to be successful, and
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the possibility that some of the appreciation of the S&P has stemmed from automated buying of these stocks by index investors, without regard for their intrinsic value.”
READ ALSO: 15 AI Stocks That Skyrocketed in Q4 and 14 AI Stocks Making Waves on Wall Street.
Assessing the Future of AI Valuations
According to the JP Morgan report, AI investing: More broadening than bubble, the current valuation gap between the largest AI-linked companies (Mag Seven) and the rest of the S&P 500 is unlikely to last. These companies now represent a significant portion of the S&P 500’s market cap and have driven a substantial portion of its returns since 2023. While the AI industry is expected to fuel the next tech revolution, the important question for investors is whether market expectations are realistic.
Currently, companies involved in AI hardware and hyperscalers are dominating, but future growth could come from other sectors, such as AI developers and integrators. While many major tech firms have strong fundamentals, the high valuations may not be sustainable if the broader market does not fully adopt AI technologies. Investors should focus on opportunities across the entire AI value chain, especially where valuations are less stretched.
For this article, we selected AI stocks by reviewing news articles, stock analysis, and press releases. We listed the stocks in ascending order of their hedge fund sentiment taken from Insider Monkey’s database of 900 hedge funds.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
13. Kingsoft Cloud Holdings Limited (NASDAQ:KC)
Number of Hedge Fund Holders: 5
Kingsoft Cloud Holdings Limited (NASDAQ:KC) provides cloud services, including IaaS, PaaS, and SaaS, mainly in China. The company also offers R&D, digital solutions for enterprises, and public cloud services across sectors like video, e-commerce, AI, mobile internet, finance, public service, and healthcare.
UBS upgraded Kingsoft Cloud (NASDAQ:KC) to Buy from Neutral and raised the price target to $12.50 from $4.20. The firm highlighted strong Q3 performance, ongoing revenue and margin recovery driven by AI, and ecosystem support. UBS projects Xiaomi’s revenue contribution to Kingsoft Cloud will grow from 20% in 2024 to over 40% by 2027 and support 13% annual revenue growth. Despite a year-to-date price rally of over 100%, the firm believes the stock remains undervalued compared to other independent cloud providers in China.
12. Xometry, Inc. (NASDAQ:XMTR)
Number of Hedge Fund Holders: 7
Xometry, Inc. (NASDAQ:XMTR) operates an AI-powered marketplace that simplifies manufacturing by analyzing parts and offering real-time pricing and lead times. Its AI-driven Instant Quoting Engine connects buyers with global suppliers for efficient production.
RBC Capital increased its price target for Xometry (NASDAQ:XMTR) from $27 to $40, maintaining a Sector Perform rating. The firm noted that the software sector could have another strong year in 2025, driven by stabilized and, in some cases, improved spending trends, generative AI’s potential for innovation, and favorable year-over-year comparisons in the first half as companies focus on growth. The outlook forms part of RBC’s broader analysis of the software industry’s performance prospects.
11. Riskified Ltd. (NYSE:RSKD)
Number of Hedge Fund Holders: 18
Riskified Ltd. (NYSE:RSKD) offers an e-commerce risk management platform using machine learning to protect merchants from fraud, policy abuse, and chargebacks. The company’s AI-powered solutions include Policy Protect, Account Secure, and PSD2 Optimize to improve security and streamline online transactions.
Riskified (NYSE:RSKD) and IXOPAY have formed a strategic partnership to improve payment security and reduce fraud in e-commerce. By combining IXOPAY’s payment orchestration and tokenization with Riskified’s AI-driven fraud detection, the partnership is looking to improve transaction efficiency, minimize chargebacks, and increase sales conversion.
The collaboration allows businesses to streamline payment processes, optimize customer experiences, and safeguard revenue. With better fraud prevention and reduced operational costs, the integrated solution will also support compliance, real-time threat response, and improved payment routing. Companies like Super.com are already benefiting from this partnership to secure transactions while maintaining PCI compliance.
10. Informatica Inc. (NYSE:INFA)
Number of Hedge Fund Holders: 22
Informatica Inc. (NYSE:INFA) offers an AI-powered platform for managing and integrating data across different systems to provide solutions for data quality, governance, and observability.
Informatica (NYSE:INFA) has expanded its partnership with Google Cloud by launching its Cloud Data Governance and Catalog (CDGC) on Google Cloud Marketplace. Built on Informatica’s Intelligent Data Management Cloud, CDGC helps organizations govern, classify, catalog, and measure data and also improves data trust and accessibility for Google Cloud users.
The integration supports AI and analytics initiatives, including Informatica’s Gen AI Blueprint for Vertex AI and Gemini models. Google Cloud’s Ritika Suri highlighted the importance of governance in AI strategies and noted that CDGC simplifies adoption and accelerates outcomes with a unified data management system. The service is now available in North America, EMEA, and Saudi Arabia.
Rik Tamm-Daniels, Global Vice President of Strategic Ecosystems and Technology at Informatica commented:
“AI-driven cataloging and governance capabilities provide a rich metadata foundation that is critical for modern analytics and AI initiatives, including Informatica’s recently-released Gen AI Blueprint for the Vertex AI platform and Gemini models.”
9. Credo Technology Group Holding Ltd (NASDAQ:CRDO)
Number of Hedge Fund Holders: 30
Credo Technology Group Holding Ltd (NASDAQ:CRDO) offers advanced connectivity solutions for optical and electrical Ethernet applications, crucial for AI-powered data processing in hyperscale and high-performance computing markets.
Stifel’s Tore Svanberg raised Credo Technology’s (NASDAQ:CRDO) price target to $85 from $80 while maintaining a Buy rating, as per The Fly. After meeting with Credo’s management at CES, the firm highlighted the growing significance of active copper technology over optical and passive cable solutions. The company’s early adoption of linear receive optics and flexible approach to optical DSPs was also noted. Stifel sees a strong growth opportunity in AI-driven data center spending, which positions Credo as a significant beneficiary despite potential market normalization in the long term.
8. Lumentum Holdings Inc. (NASDAQ:LITE)
Number of Hedge Fund Holders: 36
Lumentum Holdings Inc. (NASDAQ:LITE) manufactures optical and photonic products for applications in cloud data centers, AI/ML, and industrial tech.
Needham has designated Lumentum (NASDAQ:LITE) as its top 2025 pick for the Networking and Cloud Communication sectors, highlighting growth fueled by increasing AI investments. The firm added Lumentum to its conviction list while maintaining a Buy rating and raising the price target to $110.
The firm expects strong growth in Lumentum’s Datacom business, driven by AI infrastructure expansion, alongside a telecom recovery supported by data center WAN connectivity. Needham also highlighted the expansion of externally modulated laser production as an important catalyst, with mid-2025 capacity increases priced in and additional capacity expected to boost 2026 estimates.
7. Varonis Systems, Inc. (NASDAQ:VRNS)
Number of Hedge Fund Holders: 42
Varonis Systems, Inc. (NASDAQ:VRNS) provides software for managing, securing, and analyzing enterprise data, including sensitive information across different industries.
On January 8, Cantor Fitzgerald began coverage of Varonis (NASDAQ:VRNS) with an Overweight rating and a $60 price target as the firm highlighted data security as a growing investment priority due to trends like machine learning adoption, data growth, and increasingly sophisticated cyber threats. The firm noted that generative AI is a key focus, expected to significantly impact annual recurring revenue in fiscal 2025. Near-term revenue drivers include managed data detection and response, SaaS transitions, and growth in new customer acquisitions.
6. Coherent Corp. (NYSE:COHR)
Number of Hedge Fund Holders: 51
Coherent Corp. (NYSE:COHR) is a key player in optoelectronic devices and technologies, with its Datacom transceivers playing a crucial role in data-center connectivity.
Coherent Corp. (NYSE:COHR) and RBC have partnered to co-develop “North for Banking,” a secure generative AI solution tailored for financial services. The platform integrates Cohere’s enterprise AI expertise with RBC’s proprietary models and internal systems, with a focus on risk management and security to protect data privacy. Cohere co-founder Ivan Zhang said:
“North for Banking will be an end-to-end AI solution that financial industry firms can seamlessly integrate to increase workforce productivity and operational efficiency. By prioritizing security and data privacy protections, companies can have peace of mind as they deploy it internally at scale.”
RBC’s Dr. Foteini Agrafioti noted the bank’s commitment to AI innovation and mentioned its responsible AI principles and nearly a decade of AI investment. RBC has already implemented generative AI in its advice center and Capital Markets division to improve workflows and productivity, with plans to expand use cases in the coming months.
5. Accenture plc (NYSE:ACN)
Number of Hedge Fund Holders: 60
Accenture plc (NYSE:ACN) provides AI-driven services, including data and AI solutions, automation, and intelligent platforms, and serves sectors like communications, banking, healthcare, and energy. The company also partners with Kyoto University to advance research and innovation in human-focused AI.
Accenture (NYSE:ACN) has acquired Percipient’s digital twin platform, which integrates banks’ legacy and modern systems into a real-time hub, simplifying data use and accelerating product development without disrupting operations. The acquisition strengthens Accenture’s banking modernization capabilities and helps financial institutions in Asia Pacific adopt cloud and AI-driven services. According to Accenture, modernizing to a cloud-enabled digital core can increase banks’ revenue growth by up to 60% and profits by 40%. Percipient’s team, including CEO Navin Suri, will join Accenture to support seamless legacy system transformation and innovation for financial institutions.
4. Advanced Micro Devices, Inc. (NASDAQ:AMD)
Number of Hedge Fund Holders: 107
Advanced Micro Devices, Inc. (NASDAQ:AMD) is known for its semiconductor products, including processors and graphics units designed for data centers, gaming, and embedded systems. The company specializes in delivering high-performance computing solutions optimized for AI applications.
AMD received an upgrade from S&P Global to an ‘A’ credit rating from ‘A-‘ due to its strong growth prospects, especially in x86 product segments and AI-accelerated computing chip sales. Ratings for its short-term and commercial paper were also raised to ‘A-1’ from ‘A-2’. The stable outlook shows expectations of continued x86 server CPU market share gains and growth in the AI-accelerated computing market through 2025.
AMD is projected to achieve 13% revenue growth in 2024 and 24% in 2025, driven by strong performance in its data center segment. Strong free operating cash flow, a solid balance sheet, and careful financial policies are expected to support acquisitions and shareholder returns.
3. Uber Technologies, Inc. (NYSE:UBER)
Number of Hedge Fund Holders: 136
Uber Technologies, Inc. (NYSE:UBER) is a ride-hailing company with significant involvement in AI and autonomous driving.
BofA reiterated a Buy rating on Uber with a $96 price target, highlighting its collaboration with NVIDIA as a potential shift in the autonomous vehicle (AV) narrative. The partnership combines Uber’s extensive trip data with NVIDIA’s Cosmos platform (introduced at CES), and its DGX Cloud for AI model development.
The analyst noted that AV developments at CES, including NVIDIA’s partnerships with Uber, Toyota, and Aurora, support the expectation that multiple automakers will adopt Level 4 self-driving technology. Uber’s data-sharing could aid AV development for ridesharing use cases and prevent exclusivity to single manufacturers. Uber remains a top pick for 2025 as new AV partnerships may address concerns over industry adoption.
2. Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM)
Number of Hedge Fund Holders: 158
Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM) focuses on developing innovative semiconductor processes to drive AI advancements across multiple industries.
Bank of America Securities analyst Brad Lin maintained a Buy rating on Taiwan Semiconductor (NYSE:TSM) with a price target of $250, TipRanks reported. He expects strong revenue growth in 2025, driven by high demand for AI and high-performance computing, and advancements in technology and packaging. Lin also highlighted Taiwan Semiconductor’s appealing valuation and projected margin improvements, along with favorable industry trends and potential government incentives.
1. NVIDIA Corporation (NASDAQ:NVDA)
Number of Hedge Fund Holders: 193
NVIDIA Corporation (NASDAQ:NVDA) is known for its AI-focused technologies, delivering platforms for data centers, autonomous vehicles, robotics, and cloud-based services.
At CES, NVIDIA (NASDAQ:NVDA) announced that its DRIVE Hyperion autonomous vehicle platform has achieved key safety and cybersecurity certifications from TÜV SÜD and TÜV Rheinland. DRIVE Hyperion features the DRIVE AGX Thor SoC and is based on NVIDIA’s Blackwell architecture. It is a modular, scalable, and upgradeable end-to-end AV platform designed for both passenger and commercial vehicles.
The platform complies with ISO 21434 and ISO 26262 standards and supports AI-based functionalities, including generative AI and vision language models, for advanced autonomous driving. NVIDIA also received ANAB accreditation to inspect safety and cybersecurity for its ecosystem partners.
While we acknowledge the potential of NVIDIA Corporation (NASDAQ:NVDA) as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than NVDA but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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