By Christine Ji
You can avoid the risk of expensive tech stocks while still staying in the AI trade
Tech companies from Nvidia to DoorDash are growing faster than Wall Street expected, according to Citi.
The jury is out on whether the artificial-intelligence trade is now a bubble. But the last few weeks have shown that high valuations are fragile as investors have moved some money out of priciest technology names.
Investors looking to reduce portfolio risk but still maintain exposure to the biggest trend in the market might want to pursue a &#34;growth at a reasonable price&#34; - or GARP - strategy, according to Drew Pettit, director of U.S. equity strategy at Citi. As the name suggests, the goal of GARP is to identify companies with attractive earnings growth without overpaying.
Pettit doesn't believe an AI bubble is imminent, he said. In a note last week, Citi estimated that AI-related stocks make up nearly half of the S&amp;P 500 Index SPX by market capitalization, and AI revenue could compound over 80% annually by 2030.
However, Pettit flagged that some areas of the market are &#34;running well ahead of fundamental follow-through.&#34; Asset-heavy tech adopters, or those with significant physical infrastructure, were the biggest culprits, according to a Citi screen, trading at significantly higher valuations despite representing a much larger concentration of negative earners than the broader U.S. AI basket.
&#34;For investors looking to have AI at the core of their portfolio we stress a GARP overlay,&#34; Pettit wrote. &#34;The result is an AI portfolio with less volatility than broader AI indices and a return portfolio more comparable to the S&amp;P 500.&#34;
Also read: 5 bubble-resistant tech stocks to guard your portfolio from an AI crash
AI at a reasonable price
In the note, Citi shared a &#34;Thematic 30&#34; list of buy-rated stocks poised to be long-term beneficiaries of megatrends. Of the 30 names, 10 make the cut as GARP opportunities: Amazon.com (AMZN), Nvidia (NVDA), Uber Technologies (UBER), DoorDash (DASH), GoDaddy (GDDY), Maplebear (CART), Meta Platforms (META), Pinterest (PINS), Eaton Corp (ETN) and NextEra Energy (NEE).
The defining characteristic of a GARP stock is the price/earnings-to-growth, or PEG, ratio, calculated by dividing the P/E ratio by the annual earnings-per-share growth rate. While some stocks may look expensive on a P/E basis alone, factoring in future earnings growth can show that they are actually trading at a discount relative to their potential.
A ratio of under 1.0 can signal a favorable valuation, while a number above 1.0 can signal overvaluation. A PEG ratio of 1.0 indicates the stock is currently fairly valued relative to earnings growth. However, the benchmark can vary by industry.
To select these GARP names, Citi looked for stocks where the implied growth from current price levels is lower than or equal to the consensus forecast. Several of these names also have a lower beta, or relative volatility, than the overall Nasdaq-100 Index NDX.
The three &#34;Magnificent Seven&#34; stocks on the list have become more attractively valued after last month's selloff. Nvidia's forward P/E ratio of 24.4x is near recent historical lows. Bank of America analyst Vivek Arya wrote in a note earlier this week that, when this has happened previously, the stock has rebounded to around its median historic forward P/E of 37x in the following three to six months, indicating that the stock could be positioned to surge early next year.
Read more: Nvidia's stock is almost historically cheap - and that's a good sign for bulls
Additionally, Nvidia and Meta both currently trade below their five-year average valuations and are expected to grow earnings at a faster rate than the S&amp;P 500 and the Nasdaq-100.
Several digital AI adopters are also expected to grow their earnings faster than what their current valuations imply. In a November note, Raymond James analyst Josh Beck highlighted Uber and DoorDash as his most bullish picks among internet-marketplace stocks due to an underappreciated tailwind from robotic delivery solutions. Beck argued that Wall Street's flat growth assumptions for these companies don't factor in massive cost savings from replacing human drivers with sidewalk robots and drones.
Energy plays such as Eaton and NextEra are also seen as very reasonably valued relative to their future growth potential, as AI sends demand for power soaring. Evercore ISI analyst Nicholas Amicucci pointed to NextEra's &#34;full suite&#34; of power solutions as powerful growth drivers, arguing in a note earlier this week that the company is uniquely positioned to capture AI demand by combining reliable baseload generation with underappreciated assets like energy storage.
Philip van Doorn contributed.
Read on: 16 software stocks for investors sifting through the bargain bin
-Christine Ji
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(END) Dow Jones Newswires
12-06-25 0900ET

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<p>Citi recommends a GARP strategy for AI stocks, identifying 10 fast-growing companies like Amazon, Nvidia, and Uber as attractive investments. These stocks offer potential earnings growth without high valuations, reducing portfolio risk. Nvidia and Meta are highlighted for their favorable valuations and growth prospects. Analysts also see opportunities in energy stocks like Eaton and NextEra due to AI-driven power demand. The focus is on balancing growth potential with reasonable pricing.</p>

- Citi reports that tech companies are outperforming expectations, but high valuations in AI stocks may be fragile.  
- Investors are advised to adopt a "growth at a reasonable price" (GARP) strategy to mitigate risk while maintaining AI exposure, focusing on stocks with favorable price/earnings-to-growth ratios.  
- The "Thematic 30" list includes ten GARP opportunities, such as Amazon and Nvidia, which are expected to grow earnings faster than their current valuations suggest.

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