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AI Bubble Fears Trigger Sell-Off: Palantir Identified as Buy, Nvidia as Avoid

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  Published in Stocks and Investing on Saturday, November 22nd 2025 at 18:40 GMT by The Motley Fool

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AI Bubble Fears Trigger a Sell‑off: One Stock to Buy and One to Avoid

The world of technology has been on a meteoric rise since the advent of generative AI, with the likes of Nvidia, Microsoft, and Alphabet leaping in the market as investors chased the promise of new revenue streams and disruptive products. But a recent article on MSN Money—titled “AI bubble fears spark a sell‑off, 1 stock to buy and 1 to avoid”—suggests that the enthusiasm may be outpacing fundamentals, and that the market may be taking a breather. Below is a comprehensive 500‑plus‑word summary of the piece, with a focus on the key points, supporting data, and the article’s broader context.

1. Setting the Scene: The “AI Bubble” and the Market Reaction

The article opens by noting that AI‑related stocks have surged at a pace that some analysts now view as “bubble‑like.” The Nasdaq Composite, heavily weighted by technology names, has climbed more than 70% in 2023, largely driven by companies that have integrated or promised generative‑AI capabilities. Yet, as the markets cool off, a ripple of caution is spreading.

The author cites a June 2024 report from Morgan Stanley that warns investors that the valuation multiples for AI‑heavy companies—particularly those that have benefited from a “product‑over‑growth” narrative—have reached levels historically associated with overvalued sectors. The piece highlights that a “sell‑off” is beginning to target the highest‑priced names, as traders recalibrate expectations and start taking profits.

A key data point: S&P 500’s Technology Select Sector SPDR Fund (XLK) saw a 4.2% decline in the week ending May 31st, while Vanguard’s Information Technology ETF (VGT) dipped 5.1%. These are the first sizable negative returns for these baskets since February.

2. What’s Driving the Sell‑off? Three Main Themes

The article breaks down the sell‑off into three interlocking themes that investors should watch:

3. The “Buy” Recommendation: Palantir Technologies (PLTR)

While the article warns of a sell‑off, it also points out an opportunity for investors who are willing to bet on the long‑term payoff of AI adoption. Palantir Technologies (PLTR) is singled out as the stock to buy for several reasons:

1. Enterprise‑grade AI Adoption – Palantir’s Foundry platform is increasingly integrated into the data workflows of major banks, logistics firms, and government agencies. The article quotes a Palantir executive, “Our customers are embedding AI into their core operations; it’s no longer a feature but a necessity.”
2. Stable Cash Flow & Debt Profile – The company has a strong balance sheet, with $1.8B in cash and no long‑term debt. This gives it a cushion to weather short‑term valuation swings.
3. Earnings Outlook – Palantir forecasts a 15% YoY revenue increase for FY24, driven largely by the AI‑accelerated “Data Platform” segment. The company’s guidance appears more conservative than its peers, adding a margin of safety.

The article also notes that Palantir’s recent partnership with JPMorgan to develop AI‑driven trading tools could be a “deal‑maker” for the company, pushing the share price upward in the medium term.

4. The “Avoid” Recommendation: Nvidia (NVDA)

On the flip side, the article identifies Nvidia (NVDA) as the stock to avoid in the short‑term. Why? Several intertwined factors:

1. Valuation Premium – Nvidia’s price-to‑earnings (P/E) ratio stands at an eye‑watering 80x, far above the sector average of 28x.
2. High Sensitivity to AI‑Demand Cycles – Nvidia’s core revenue comes from GPU sales, which have become a commodity in the generative‑AI race. The article cites a Wall Street Journal piece that warns of “demand volatility” if AI models move to cheaper, cloud‑based inference solutions.
3. Debt & Capital Expenditures – The company has recently taken on $3.5B in debt to fund its acquisition of Mellanox. This could limit free cash flow and hamper future R&D.

A key line from the article: “If Nvidia’s GPU sales decline or the pricing pressure from cloud providers escalates, the company’s growth story could unravel—making it a risky bet.”

5. Additional Context: Links and Resources

The MSN Money piece links to several external sources that deepen the reader’s understanding:

• Nasdaq’s “AI‑Driven Stock Performance” Blog – Provides a quarterly snapshot of AI‑related companies’ valuation trends.
• Bloomberg’s “Valuation Multiples in the Tech Sector” Chart – Offers a side‑by‑side comparison of multiple companies’ P/E and EV/EBITDA.
• Federal Reserve’s Monetary Policy Statement – Gives context on the macro backdrop, especially the 4% interest rate hikes.
• Morgan Stanley’s AI Equity Outlook Report (PDF) – Offers a detailed breakdown of the sector’s valuation metrics and the research behind the buy/avoid calls.

These links help contextualize the article’s argument, illustrating how the AI market is influenced not just by technology trends but also by macroeconomic policy and valuation dynamics.

6. Bottom Line: A Cautious Yet Optimistic Outlook

In summary, the article paints a nuanced picture:

• The AI sector is experiencing a temporary pullback as valuations crest and macro‑risk premiums tighten.
• Investors who want to stay invested in AI should look for companies with robust enterprise adoption, solid cash flow, and realistic growth expectations—like Palantir.
• Caution is warranted with high‑growth, high‑valuation names that are heavily reliant on GPU sales and exposed to demand volatility—like Nvidia.

Ultimately, the piece suggests a “buy‑low, sell‑high” strategy in a sector that is still in the early days of a potentially transformative technology, but where the price of exuberance is becoming increasingly visible. As always, investors should align these signals with their own risk tolerance, investment horizon, and portfolio diversification goals.