AI stocks fall 25% from peaks as valuations compress, Barclays says

Barclays' basket of 12 AI stocks has shed about a quarter of its value from February peaks, with implied valuation multiples compressing 17 percent in the past month.

US AI stocks have fallen an average of 25 percent from their February peaks, with implied valuation multiples compressing 17 percent in the past month, Barclays data show. The 12-name basket tracked since Feb. 11 has seen nearly half of its members trade at the lowest implied AI price-to-earnings multiples of the tracking period, the bank said in an Aug. 4 report.

Barclays analysts said the pullback reflects stocks having run up ahead of earnings, with results failing to justify further multiple expansion even as hyperscaler capital-expenditure forecasts keep rising. The S&P 500 fell 1 percent and the Nasdaq 100 dropped 5 percent in the July 6-31 window, while the AI basket declined by a mid-single-digit percentage over the same stretch, the report showed.

The de-rating has been steepest in electronic manufacturing services and optical names. Corning has fallen 46 percent from its peak, Fabrinet 42 percent, Coherent 40 percent, and Flex and Super Micro Computer 30 percent each, while Dell is down 13 percent and Arista Networks 4 percent. Corning's implied AI multiple collapsed to 76 times from 155 times, dragging the basket average to 43 times from 52 times.

Optical and EMS Names Bear the Brunt

Within the basket, implied AI multiples now cluster at 20-30 times for most EMS companies including Fabrinet, Celestica, Jabil and Flex, while Arista and Hewlett Packard Enterprise trade at 45-70 times. Super Micro Computer sits at about 2 times, depressed by company-specific issues rather than industry fundamentals, Barclays said. Despite the retreat, AI stocks remain up about 60 percent year to date, versus a 9 percent gain for the S&P 500.

Non-AI Stocks Draw Rotation as Multiples Reset

The valuation reset has not tracked fundamentals. Barclays raised its cloud AI revenue compound annual growth forecast for 2023-2027 to about 65 percent from 53 percent, with Dell's CY26 cloud AI revenue growth seen at 144 percent, Cisco's at 127 percent and Corning's at 90 percent. The covered names account for roughly 20 percent of global cloud and AI capital expenditure.

The rotation has favored names left behind in the first-half AI rally. Non-AI stocks in Barclays' coverage gained a low-double-digit percentage on average in the July 6-31 period, beating the S&P 500's 1 percent decline. Garmin and Nutanix each rose 27 percent, Taser 25 percent, Motorola Solutions 9 percent and Apple 4 percent, as investors hunted for value outside the crowded AI trade.

The divergence sets up a test for the second half: whether AI earnings can justify the multiples that remain, or whether capital keeps rotating toward cheaper, under-owned names. Barclays' next basket update will show whether the valuation floor holds as hyperscaler spending continues to climb.

This article is for informational purposes only and does not constitute investment advice.