Artificial intelligence shares may look pricey after their powerful rally this year, but Citigroup Inc. believes they have not yet entered true bubble territory.
“AI does not look like a bubble yet based on our valuation monitor,” analysts at Citi wrote, while also cautioning that “there are some growing pockets of valuation concern when we dive deeper within the theme, especially in more asset heavy sub-categories.”
The analysts noted that although recent performance has been “abnormally strong,” their valuation tracking shows “only a couple ‘red flags’ in our valuation monitor for broad AI exposure.”
Given this backdrop, Citi said it “would stay invested in AI,” while also acknowledging that taking some profits is sensible in “more U.S. asset heavy businesses and International AI Adopters.”
The bank reiterated its strategy of GARP — Growth at a Reasonable Price — advising clients to diversify and prioritize “AI at a Reasonable Price.” Citi explained that these investment baskets “include a diversified set of names where FY3 EPS consensus is in-line/ahead of market-implied expectations,” which “should lead investors away from the most acute pockets of bubble risk.”
Citi also unveiled a new layer of classification to its AI framework, building on earlier segmentation by region, sector and value chain position. This updated model emphasizes the difference between “asset light versus asset heavy companies,” a distinction the bank says will be increasingly important “as the number of stocks tied to AI expands.”
“When bubbles do build, it’s earnings expectations faltering that ultimately end the run,” Citi said, adding that it remains “comfortable with AI growth outlooks” thanks to “impressive Mega Cap Growth free cash flow” and rising estimates for AI capital expenditure.