Worried about an artificial intelligence (AI) stock bubble? Consider this billionaire investor’s advice.

If you think we’re starting to see the bubbles in artificial intelligence (AI) stocks, you’re not alone.

There are plenty of comments online about a bubble forming in AI stocks, so it’s no wonder investors think so. arm holdings (arm -4.00%)The maker of CPU chips, praised for their efficiency in AI applications, rose as much as 42% on Monday, after rising 48% last Thursday following a strong earnings report.

super microcomputer (SMCI -19.99%)a maker of servers and storage equipment suitable for running AI models, is up 169% year-to-date with a market share of Nvidia (NVDA -0.06%)the flagship of the generative AI revolution, grew 46% this year after more than tripling last year.

Indeed, there is some evidence that bubbles (irrational spikes in asset prices that ultimately lead to crashes) are forming in AI stocks. That’s because some of the gains in some of these stocks have been decoupled from any meaningful change. Basic things.

In other words, although there is a lot of hype, it is also an opportunity for investors because volatility represents an opportunity to make money. If you think the skyrocketing AI stock price is a warning sign for investors, George Soros, billionaire investor and chairman of Soros Fund Management, one of the most successful investors in history. Why not consider this advice? According to some reports, his Quantum Fund, at $39.6 billion, was the most successful hedge fund in history. Among other things, Soros is famous for making $1 billion in one day by shorting the British pound in 1992.

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George Soros’ approach to stock market bubbles

In 2009, Soros famously said, “When you see a bubble forming, you rush to buy and add fuel to the fire. That’s not unreasonable.”

Soros also notes that “there is a two-way, reflexive connection between perception and reality that can lead to an initially self-reinforcing but ultimately self-destructive boom-and-bust process, or bubble.” “There is,” he said. This explains much of the psychology driving the rise in AI stocks. These companies have performed well and are benefiting from the AI ​​boom, but investors are also attracted to rising momentum, believing these stocks will continue to rise.

Soros’ approach has made him aggressive when he believes he is right. Fellow billionaire investor Stanley Druckenmiller said, “As far as Soros is concerned, when something is right, you can never have enough of it.”

But even with the AI ​​bubble, Soros doesn’t seem to be following his own advice, at least as of September 30, when his fund’s holdings were last reported. The Soros Fund bought 17.4 million shares of Arm stock in the third quarter, but sold all of its holdings in Nvidia and stock. microsoft They each sold 10,000 shares, a sign that the company may think the profits from those shares are exhausted.The fund also bought puts. Invesco QQQ Trusttrack. Nasdaq-100suggesting it was betting on a decline in top tech stocks, but that may have just been a hedge.

Will there be an AI stock bubble?

It would be easy to spot sudden gains in stocks like Nvidia or Supermicro and conclude that an asset bubble is forming, but the results for these stocks show that these gains are not unwarranted. Masu. For example, NVIDIA reported in its third quarter earnings report that revenue more than tripled and profits jumped 12x. From these numbers, it’s clear that NVIDIA’s business is growing rapidly, along with its stock price. In fact, the company’s price-to-earnings valuation has declined over the past year as earnings growth has outpaced stock price growth.

It’s also clear that Wall Street analysts are underestimating demand for critical AI infrastructure like Nvidia’s chips, as Nvidia regularly soars beyond Wall Street expectations. Similarly, supermicro stocks have soared since January’s preliminary earnings report significantly beat analyst consensus. The recent surge in Arm stock is also due to the fact that analysts are likely significantly underestimating future earnings due to the rise in demand for AI.

Investors in AI stocks should be wary of bubbles forming and should keep an eye on these and other stocks to see if the company’s performance justifies the gains, but at this stage AI It appears that the hardware sector still has some momentum. building. In that case, investors may follow Soros’ advice and try to ride the bubble, as it is likely to rise further.