As the excitement around AI shows little sign of slowing, one analyst has identified several warning signs that could indicate a correction is coming. In a research note titled “Magic Money Tree,” Richard Windsor, veteran technology stock analyst and founder of research firm Radio Free Mobile, warned that money is flowing into the AI sector, “with very little attention paid to the fundamentals of the company at any given time. a sure sign that when the music stops there won’t be many chairs available.” He outlined three recent events that give him cause for concern: Cohere Valuation The first is that generative AI company Cohere is reportedly on track to raise money at a $5 billion valuation. That’s nearly double its value in June last year, when the startup raised $270 million at a $2.2 billion valuation. Windsor described it as “the last sign of…reckless abandonment.” “Cohere will now be worth $5 billion, even though the annual rate of return on his earnings in 2023 was only $13 million,” he said in the March 28 note. He said the company’s valuation “equivalent to a historical price-to-sales ratio of 384x which indicates that investors have another bad case of FOMO (fear of missing out) and are rushing into anything that can be remotely associated with the ‘artificial intelligence.” Company president Martin Kon recently told CNBC that Cohere, backed by Nvidia and started by former Google AI researchers, is betting on generative AI for enterprise use, rather than chatbots. Inflection AI deal Windsor, who covered the global tech sector at Nomura Securities for 11 years before starting his own firm, has raised another “red flag”: Microsoft’s apparent deal with Inflection AI. “Another wake-up call was Microsoft’s ability to hire the CEO and 70 employees of the Inflection AI start-up,” he said. “Things were not going well at Inflection AI because if the company had done very well, Microsoft’s advances would have been quickly rejected.” In what was described as an “unusual deal,” tech giant Microsoft reportedly agreed to pay Inflection AI around $650 million in cash, allowing it to hire the startup’s staff and use its technology. Investing in Amazon Highlighting the “FOMO effect” around AI, Windsor noted that even tech giant Amazon is not immune. “Amazon has invested another $2.75 billion of its total $4 billion commitment into Anthropic, and I’m quite certain that Amazon will end up acquiring the company,” he said. Amazon’s biggest-ever investment will see it continue to pump money into the generative AI start-up, which has a Claude chatbot that competes with OpenAI’s ChatGPT. Stocks to buy if ‘forced’ “The frenzy continues, but it’s one that I feel perfectly comfortable staying well away from,” Windsor said of the AI sector currently. If “forced” to enter the sector, Windsor said he would buy Nvidia, noting that the American chip-making giant has been the main beneficiary of the AI hype to date. The stock is up about 80% year to date and 240% over the past 12 months. “Nvidia is really the only company that is making tangible profits from the current boom in investment interest in generative AI, but when there is a correction, Nvidia will no longer stand a chance, although I suspect it will suffer much less than expected. many more,” he said. He added that he already owns Qualcomm’s stock chip, which is “excellently positioned to benefit from the implementation of cutting-edge generative AI.” — CNBC’s Kate Rooney contributed to this report.