We recently compiled a list of the Top 10 AI Stocks to Watch Ahead of Potential Market Correction. In this article, we are going to take a look at where Upstart Holdings, Inc. (NASDAQ:UPST) stands against the other AI stocks.
Has Artificial Intelligence Fuelled a Big Bubble in Tech?
That’s the big question, according to managing partner at Deepwater Asset management Gene Munster. The revolutionary technology has been the catalyst behind two years of blockbuster gains in the equity markets. With major market indices trading near all-time highs, overstretched valuations are increasingly sending jitters in the investment community.
Nothing has been more significant than the emergence of artificial intelligence (AI). Even though the stock market has been driven by various factors, such as Donald Trump’s victory in November, stock-split euphoria, dovish Fed policy, and better-than-expected earnings, AI has triggered eye-watering valuations. Nevertheless, a potential correction from current highs is on the horizon.
“I agree that Nvidia will have a day of reckoning — and the chip stocks, the whole trade. And the question for us isn’t, ‘Will the bubble burst?’ It’s, ‘How high will we go before the bursting of the bubble?’ Munster said.
While the overall market has pulled back significantly since peaking late last year, Munster insists there are another two years of solid gains before a potential bubble burst. According to the tech analyst, the bubble burst could result in a 30% decline in the tech-heavy index NASDAQ on the artificial intelligence hype running out.
Momentum in the equity market has subsided significantly in recent months, particularly among the big five tech stocks, and the market is signaling that the extraordinary growth and gains of 2024 will be difficult to replicate in 2025. Amid these growth concerns, investors should focus on AI plays trading at depressed valuations and companies backed by solid financials and long-term growth opportunities.
Analysts at Bank of America remain optimistic about the US software market outlook despite growth rates slowing down in recent months. While the sector grew by 59% in 2023, attributed to the AI frenzy, the growth rate slowed to 23% in 2024. However, given that multiples are still below expectations, there are still opportunities to unlock.
“Revenue multiples and growth expectations remain below 5-year median and pre-Covid levels,” the bank said in its Jan. 14 report, pointing to the potential of three secular themes for 2025: Agentic AI, growing enterprise IT budgets, and sustained cloud migration.
According to the bank, tech heavyweights spending heavily on AI and expanding on investments in 2025 is one factor that should fuel growth in the software sector. Likewise, the analysts expect sustained migration to the cloud to be a key driver of the software sector.
“Although we remain selective on small caps, we are bullish on the software sector for 2025, particularly in 2H, as accelerating secular tailwinds and easing cyclical headwinds converge,” the firm added.
Our Methodology
For this article, we selected AI stocks by going through news articles, stock analysis, and press releases. These stocks are also popular among 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).
A close-up of a businesswoman using a laptop, being illuminated by the AI-enabled cloud interface sponsored by the company.
Upstart Holdings, Inc. (NASDAQ:UPST)
Number of Hedge Fund Holders: 29
Upstart Holdings, Inc. (NASDAQ:UPST) is a financial services company that operates a cloud-based artificial intelligence (AI) lending platform. Its platform includes personal loans, automotive retail and refinance loans and small-dollar loans that connect consumer demand for loans. The company has dropped a game-changing update on its Auto Retail platform, which is expected to shake up the dealership floor. The update comes with faster deal processing, an AI-powered financial module, and a revamped credit dashboard.
Thanks to AI integration, dealerships can close deals much faster and get customers approved for financing. The upgrade comes with the company unveiling an AI-powered algorithm that’s becoming a game changer in the way financial institutions assess potential borrowers, leading to more approvals and fairer interest rates. Upstart Holdings, Inc.’s (NASDAQ:UPST) secret sauce is its AI lending model, which enables banks to approve more loans without increasing defaults.
Overall UPST ranks 5th on our list of the AI stocks to watch ahead of potential market correction. While we acknowledge the potential of UPST as an investment, our conviction lies in the belief that some 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 UPST but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: 20 Best AI Stocks To Buy Now and Complete List of 59 AI Companies Under $2 Billion in Market Cap.
Disclosure: None. This article was originally published at Insider Monkey.
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