Jim Cramer: Why AI Stocks Are Facing Market Carnage

Jim Cramer, host of CNBC’s ‘Mad Money’, expressed concerns over the increasing difficulty in valuing AI stocks due to uncertainty surrounding data center build-outs. He highlighted companies like Nvidia, Micron, and AMD, noting that while they deliver strong results, potential slowdowns in AI infrastructure spending could significantly impact their valuations.

Investors are worried about regulatory hurdles and opposition to new data centers, which could slow down the essential infrastructure needed to support AI growth. Cramer suggests that until the outlook for data center development becomes clearer, even exceptional earnings might not justify current stock prices in the AI sector.

READ MORE FROM CNBC

CNBC's Jim Cramer highlighted on Thursday that the booming artificial intelligence (AI) sector is becoming increasingly difficult to value. This uncertainty stems from questions surrounding the future of data center build-outs, which directly impacts the long-term growth prospects of AI-related companies. The recent market sell-off has significantly affected this sector, hitting chipmakers and companies that supply infrastructure for data centers.

The iShares Semiconductor ETF (SOXX) saw a 3% drop on Wednesday and a further 10% decline on Thursday. GE Vernova and Sandisk also experienced notable drops of 7% and 22% respectively. Investors are increasingly concerned about potential regulatory hurdles and public opposition to new data center construction, which could slow down the pace of development and, consequently, impact the growth forecasts that have driven high valuations for chipmakers.

Jim Cramer: Why AI Stocks Are Facing Market Carnage

VIDEO2:4002:40

Nvidia has not gone all in when it comes to its own stock, says Jim Cramer

Mad Money with Jim Cramer

"We don't know what to pay for any of the stocks connected to the data center and that's why this moment is so fraught," Cramer stated on his show, "Mad Money."

Cramer specifically pointed to Nvidia, a leading AI chipmaker, which currently trades at approximately 12 times its projected earnings for the next year, with an expected growth rate of 70%. Despite appearing cheap on these metrics, Cramer cautioned that these earnings projections are contingent on sustained strong demand for years to come. "That's an incredible bargain," he said. "But it is not a bargain if, the following year, it can't grow any further, because the U.S. won't permit new data centers as fast as they do now."

Memory manufacturer Micron also faces similar risks. While the company benefits from long-term take-or-pay contracts that offer some revenue visibility, Cramer expressed uncertainty about the durability of these contracts if clients encounter severe financial difficulties and cannot fulfill payment obligations.

Advanced Micro Devices (AMD) presents another valuation puzzle. Cramer lauded its recent earnings report as "one of the best quarters I have ever seen" and noted CEO Lisa Su's projection that the broader data center market could eventually reach $1 trillion. However, he questioned the current stock price, noting, "If that's the case then you can buy her [CEO Lisa Su's] stock right now," but added, "Do you want to? The stock was at $188 in March. By that token, $404 seems awfully high to me. Maybe that's the real problem."

The core issue, according to Cramer, boils down to whether regulatory challenges will significantly impede data center construction or merely cause delays. Until this uncertainty is resolved, even strong earnings outlooks might not be sufficient to justify the current valuations of AI stocks.

Cramer's Charitable Trust, managed by CNBC's Investing Club, currently holds shares of NVDA and MU.