Key Points
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Investors are stepping back to more carefully scrutinize AI spending and potential returns.
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Cash flow, debt, and market position all matter.
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One clear leader is trading at a very reasonable price.
- 10 stocks we like better than Nvidia ›
Predictions that an artificial intelligence (AI) bubble in the stock market would pop have been wrong. Or maybe not right just yet.
There’s no denying that there is froth in the sector. Unprofitable names have been bid up to lofty valuations based on expectations that heavy spending on AI infrastructure will continue and that investments will produce strong returns.
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But the “everybody wins” mentality is finally subsiding, and the AI frenzy is cooling. Analysts are now looking at debt levels, determining funding capabilities, and focusing on cash flow. Winners and losers will be determined by those factors, and where the technology is most disruptive.
That’s where savvy individual investors should also focus when creating a portfolio containing AI stocks.
Image source: Getty Images.
Good companies may have been bid up too far
With all the spending on securing AI infrastructure and private company participation, it’s not really clear what the long-term leaders in the space will be. That’s why it makes sense for retail investors to diversify. Taking an approach similar to buying an exchange-traded fund (ETF) can help reduce risk while still aiming to achieve outsize returns.
Some stocks that look safe may have run too far, too fast. Take Microsoft (NASDAQ: MSFT), for example. Shares of the company had been soaring over the past year as its investment in ChatGPT creator OpenAI, spending on AI infrastructure, and its Azure cloud business seemed to set the company apart.
But Microsoft shares dropped in 2026, with several analysts predicting that Microsoft’s extraordinary AI spending will pressure profitability. Stifel‘s Brad Reback recently downgraded the stock and dropped his price target by nearly 30%. The analyst said it is “time for a break” after all the AI hype. Shares are down by more than 16% year to date and are 26% off six-month highs.
Diversify with concentration
Over the long term, Microsoft is still worth having, but its price action shows why a diversified portfolio of AI holdings makes sense. More and more businesses will begin using AI, so there will be gains ahead. While a mix of AI-related stocks makes sense, consider anchoring that portfolio with one clear leader.
During its fiscal 2026 second-quarter conference call last summer, Colette Kress, chief financial officer at Nvidia (NASDAQ: NVDA), told investors the company expects between $3 trillion and $4 trillion to be spent by 2030 to build AI infrastructure. She reiterated that in the third-quarter call last fall, stating, “The scale and scope of these build-outs present significant long-term growth opportunities for Nvidia.”
Her company doesn’t need to pick winners and losers. It will benefit from growth in the AI sector, and there is little argument that it will continue to grow.
The stock is also trading at a reasonable valuation with a forward price-to-earnings ratio of about 25. With froth and frenzy in the sector settling down, investors will likely do well to build a diversified portfolio of AI-related names, with Nvidia as the anchor holding.
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Howard Smith has positions in Microsoft and Nvidia and has the following options: short February 2026 $170 calls on Nvidia. The Motley Fool has positions in and recommends Microsoft and Nvidia. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
