Generated Title: "Tech's Q3 Fair Value Frenzy: Is It AI or Just Hype?"
Alright, let's dissect this "fair value" bump we're seeing in tech stocks. Morningstar analysts are patting themselves on the back for increasing their estimates, but is it justified, or are we seeing another AI-fueled mirage?
Digging Into the Numbers
The headline is that tech stocks saw some of the largest fair value estimate increases during Q3 earnings season. Specifically, about 18.8% of tech companies covered by Morningstar saw an increase of at least 10.0%. That's a notable jump from last quarter's 9.4%—the highest in four years, actually. But let's look at the names driving this: SanDisk, Western Digital, AMD, Alphabet, Reddit, and Cloudflare all got significant boosts.
SanDisk's fair value estimate went from $40 to $135—a whopping 237.5% increase. Western Digital wasn't far behind, jumping from $82 to $165 (a 101.2% rise). The analysts are citing a "positive NAND pricing cycle" and "AI's insatiable demand for storage capacity." Okay, fair enough (no pun intended), but let's not just take their word for it.
AMD got a double bump, first on news of a deal with OpenAI, then again after their investor day. The final fair value estimate landed at $270, up from $155. Alphabet also saw two increases, fueled by Google Cloud's growth and a deal with Anthropic. Their fair value went from $237 to $340. Reddit and Cloudflare are also in the mix, with analysts pointing to improved monetization and strong sales growth.
But here's where my eyebrows start to raise.
The "Fair Value" Mirage?
Morningstar increased its fair value estimate for Reddit to $200, up from $140, citing "monetization potential and margin profile." But they also admit the stock is "fairly valued" after a 10% jump on the news. So, they're saying it's fairly valued after the increase? That sounds like circular logic to me. I've looked at hundreds of these filings, and that particular phrasing is unusual.
And what about the analysts themselves? Are they just chasing the market's tail? Remember, a "fair value estimate" is just that—an estimate. It's a model, and models are only as good as the assumptions you feed into them. Are these analysts baking in sustainable growth, or are they extrapolating short-term hype?
Western Digital's analyst, Eric Compton, says that if AI demand and pricing remain this strong past 2027, we could even see upside from here. So, the entire valuation hinges on a projection three years out. That's a lot of uncertainty to hang your hat on.
The article states, "Across the 840 US-listed stocks covered by Morningstar, there was a 2.5% average increase in fair value estimates during this earnings season, slightly below last quarter’s 2.7% increase." The fair value increase is slowing! If a rising tide lifts all boats, what happens when the tide recedes? Are these tech stocks going to be left high and dry? You can read more about the specific stocks with the largest fair value estimate increases in Q3 in 10 Stocks with the Largest Fair Value Estimate Increases During Q3 Earnings.
So, What's the Real Story?
The "AI revolution" is real, but the market's reaction is often… well, let's just say enthusiastic. It's easy to get caught up in the hype, but it's crucial to remember that these fair value estimates are just educated guesses. Don't blindly follow the herd. Do your own due diligence, and don't confuse potential with reality.
