Citi Says AI Stocks Still Fairly Valued Despite Rapid Gains
Artificial intelligence (AI) stocks have surged this year, prompting some investors to question whether the rally has entered bubble territory. However, analysts at Citi believe valuations remain within a reasonable range, even after the sector’s sharp rise.
In a recent note, Citi stated that “AI does not look like a bubble yet based on our valuation monitor,” though it cautioned that certain asset-heavy segments within the AI sector are showing early signs of overheating.
Citi Remains Bullish but Urges Selectivity
While recent price momentum has been unusually strong, Citi said its data reveals only a few red flags across broader AI exposure. The bank continues to recommend staying invested in AI, while advising investors to take profits in U.S. asset-heavy firms and international AI adopters that may be nearing valuation extremes.
Citi suggested investors apply a GARP (Growth at a Reasonable Price) strategy, focusing on AI companies with earnings growth aligned to or above market expectations. According to the report, this approach helps avoid the most overvalued pockets of the market while maintaining exposure to high-quality AI leaders.
Focus Shifts to Business Models and Earnings Strength
The bank also expanded its AI valuation framework, now classifying companies not just by region, sector, or value chain position, but also by business model type — distinguishing between asset-light and asset-heavy firms. Citi believes this distinction will be critical for tracking AI trends as the number of publicly listed AI-related stocks continues to grow.
Citi concluded that while AI enthusiasm is high, it remains comfortable with current growth expectations, supported by strong free cash flow from mega-cap tech companies and rising capital expenditures in AI infrastructure.
“When bubbles form, it’s collapsing earnings expectations that ultimately end the rally,” Citi noted. “Right now, that’s not what we’re seeing in the AI space.”
