Generated Title: Wall Street's AI Hype Check: Are These Tech Valuations Real, or Just a Mirage?
Alright, let's talk about these tech stock valuations. Seems everyone's tripping over themselves to declare a new AI-fueled gold rush, but I'm seeing some discrepancies that need a closer look. Morningstar analysts, bless their hearts, have been busy revising their fair value estimates, and the tech sector is leading the pack. But are these increases justified, or are we just witnessing a collective hallucination?
The AI-Driven Valuation Binge
SanDisk, Western Digital, AMD, Alphabet, Cloudflare – the usual suspects are all seeing massive valuation bumps. SanDisk's fair value estimate, for instance, jumped from $40 to $135. Western Digital went from $82 to $165. That's not a tweak; that's a full-blown reevaluation. These increases aren't isolated events. Across 840 US-listed stocks covered by Morningstar, the average fair value estimate increased by 2.5% this quarter. Not bad, but the tech sector is skewing the curve.
The Morningstar analysts attribute much of this to AI. Western Digital, for example, is supposedly benefiting from "artificial intelligence’s insatiable demand for storage capacity." Seagate is seeing high demand for its nearline drives because of AI-generated media content. And AMD? Well, they landed a deal with OpenAI to supply AI gear, potentially earning "tens of billions of dollars of annual incremental revenue." S&P 500 rips 1.6% higher, Nasdaq posts best day since May as Alphabet reignites AI trade.
But here’s the thing: promises are cheap. Let's get real. How much of this AI revenue is actually booked, and how much is baked into these valuations based on projections that could easily fall flat?
Questioning the Methodology
Let's talk about Morningstar's methodology for a minute. I've looked at hundreds of these reports, and it's usually pretty solid, but fair value estimates are still…estimates. They're based on models, and models are only as good as the assumptions you feed them. Are these analysts properly accounting for the potential downside risks? What about competition? What about the possibility that this AI boom is just a temporary bubble?
For example, look at SanDisk. Analyst William Kerwin admits that the stock has quadrupled since August and that it's still overvalued, even after the massive fair value increase. (That's the parenthetical clarification I promised.) So, they're saying the company is worth more, but also that the market is already way ahead of itself. Does that compute?
And then there's AMD. Analyst Brian Colello raised AMD's fair value after the company's investor day, where they presented updated revenue growth targets. (The exact increase was from $210 to $270.) They're projecting 80% growth in data center AI products and 35% for total AMD. But here's the self-correction for precision: AMD expects the deal to earn tens of billions of dollars of annual incremental revenue, and the rollout starting in the second half of 2026. Expectation is not revenue. And I am seeing a lot of expectation being priced into stocks.
Here's what's missing from the reports: a rigorous sensitivity analysis. What happens to these fair value estimates if AI demand slows down? What if a competitor releases a better product? What if the regulatory environment changes? These are not black swan events; they're reasonably foreseeable risks that should be factored into any valuation model.
The Mirage Effect
This whole situation reminds me of a mirage in the desert. You're thirsty, you see water in the distance, and you start running towards it. But as you get closer, the water disappears. It was never real; it was just an illusion created by the heat.
Are these tech valuations the same thing? Are investors seeing the shimmering promise of AI and projecting their hopes and dreams onto these companies, driving up their prices to unsustainable levels? I'm not saying that AI is a hoax. It's clearly a transformative technology with the potential to revolutionize industries. But potential doesn't equal profit. And right now, I see a lot more potential than profit baked into these valuations.
I've noticed that there is a growing sentiment about the lack of real-world applications for AI. There are some comments about how many people are being laid off by companies that are investing in AI and how that is not a sign of stability.