With Christmas gift listicles far and wide touting the benefits of AI-powered versions of everyday items, including tooth brushes, shoes, BBQs, cat doors and bird feeders, it’s no surprise that sentiment surrounding a potential AI bubble is on the rise, calling into question the technology’s ultimate utility.
This article is a journalistic opinion piece which has been written based on independent research. It is intended to inform investors and should not be taken as a recommendation or financial advice.
Let’s begin by saying that, for everyday people, the benefits of AI are robust and will likely not be going anywhere. The ability to access large language models, including those underlying services such as ChatGPT, Google Gemini and Microsoft Copilot, and ask them any question under the sun, makes the tedious and time-consuming nature of idea generation a thing of the past, allowing users to generate drafts based on specific parametres in an instant.
In this way, even though the proliferation of AI is only a few years old, prompted by the release of ChatGPT in 2022, the technology has boosted productivity in every industry by starting projects off with more momentum than they would have garnered by drawing on human intellect alone.
Besides idea generation, AI also outperforms the human mind when it comes to data processing, as it’s capable of deriving conclusions from massive data sets that would take someone years to properly consider, yielding advancements in everything from disease detection, to autonomous vehicles, to natural disaster prevention, that are having a tangible effect on the lives of everyday people across the world.
In sum, AI’s added speed and efficiency are not fads, but signs of progress, creating value where none existed before.
To locate irrational exuberance in the space, we must shift to an investment perspective, drawing attention to the thousands of new stocks that have popped up over the past three years, keen on highlighting their AI products or services as optimal vehicles towards more effective outcomes.
This effusive onslaught, akin to the Dot Com boom of the late 1990s, and the proliferation of sub-prime mortgages in the mid 2000s, doesn’t suggest these companies have little of value to offer, but that they are receiving more capital than they can responsibly allocate, resulting in some of the highest valuation multiples in any industry today, in certain cases reaching beyond 50 times enterprise value (EV)/EBITDA for profitable companies and 100 times EV/revenue for early-stage companies. These figures mean that investors are willing to pay $50 for every dollar in annual cash flow and $100 dollars for every dollar of annual revenue, making them frothy to say the least.
Should AI valuations fall precipitously, driven by a Black Swan event to be determined, investors partial to solid fundamentals and rational business plans are more likely to weather the storm in one piece, benefitting from higher conviction to buy shares at a discount, when sentiment is at its bleakest, knowing full well that their portfolio companies are fulfilling unmet needs in target markets with long-term demand.
To help readers home in on bubble-proof AI stocks more effectively, I’ve created a short step-by-step guide designed to usher you from research, to buying the stock, to an eventual sale, without losing sight of the financial goals that motivated you to invest in the first place:
- Identify AI stocks solving marketable problems.
- Limit your investable universe to profitable growth or paths to profitability.
- Vet the leadership team’s business development skills.
- Fit your AI stock into your asset allocation and overall financial plan.
- Sell opportunistically to fund your financial goals.
How to pick AI stocks built to thrive through a potential bubble
1. Identify AI stocks solving marketable problems
The bedrock of longevity for any company, but especially one active in a nascent industry such as AI, is its ability to solve a problem more thoroughly than the competition, ideally producing data that clearly demonstrates the space between legacy methods and its next-generation technology. A company that doesn’t make life better in some way has little to argue for remaining a going concern.
When it comes to finding value-added AI stocks, the compilation process is often tedious, involving a wide range of sources, Stockhouse among them, especially when small-cap stocks are sought out, which is why examples are helpful to recognize what you’re looking for.
Innodata
One company that could serve as a template for your due diligence is Innodata (NASDAQ:INOD), a data engineering specialist helping top tech names, including five of the Magnificent Seven, harness the power of Generative AI to improve the speed, scale and efficiency of how they process data.
The company posted record revenue and profitability in Q3 2025 and expects further momentum in 2026, driven by its high-profile clientele and practical product suite – touching on everything from legal and compliance workflows, to medical data, to influencer intelligence – better positioning itself to garner share in the rapidly accelerating Generative AI IT services market, which McKinsey expects to reach US$200 billion by 2029.
2. Limit your investable universe to profitable growth or paths to profitability
While figuring out how to use AI to improve client operations is fundamental to long-term success, companies will stand a chance at satisfactory returns only if this improvement shows up on its income statements, supporting investor enthusiasm after the hype dies down and the market moves on to the next hot sector of the day.
What investors should be looking for here, in an ideal world, is positive net income and/or free cash flow, jargon for funds in hand after all expenses have been paid, demonstrating that leadership is doing a good job allocating capital and pursuing growth initiatives.
If the company isn’t profitable because it’s investing heavily in growth, we can swap the above metric out for EBITDA or adjusted EBITDA, reflecting how much cash is coming into the business before major expenses have been paid, making sure to hold leadership accountable in terms of justifying growth with evidence of a path to bottom-line profitability.
Nextech3D.AI
An AI stock whose underlying company shows this framework in action is Nextech3D.AI (CSE:NTAR), a 3D asset generation, spatial computing and AI event solutions provider that has cut its net losses every year from US$32.6 million in 2021, to C$27.3 million in 2022, to C$25.6 million in 2023, to C$6.7 million in 2024, gradually inching its way to being in the black.
3. Vet the leadership team’s business development skills
Having established an AI company’s products to be worthwhile, with ample evidence in its financial results, the next step investors should take is verifying that progress is the result of skill, not luck, requiring a thorough assessment of the leadership team.
Xtract One Technologies
AI-powered security company, Xtract One Technologies (TSX:XTRA), offers us a workable rule of thumb, boasting a bespoke leadership team with backgrounds fit to guide its patron screening devices towards greater market share. Here’s a quick rundown on key members:
- Peter Van Der Gracht, chairman, launched, financed, operated and sold five technology companies, including Nexus, Imedia, Teraspan, Fatport and Wavemakers.
- Peter Evans, director and chief executive officer, brings more than 25 years in venture capital, private equity and public companies active in technology, telecom, SaaS and cybersecurity.
- Karen Hersh, chief financial officer (CFO) and corporate secretary, previously served as the CFO of a global private equity company focused on cybersecurity technologies.
- John Gillies, director, spent more than 33 years working with the Canadian government on intelligence and national and international security, including direct experience with the RCMP and Canadian Security Intelligence Service.
Any reasonable investor would suppose that these executives possess the problem-solving skills to transform a tech-centric business plan into a well-oiled machine, given that they’ve done it before, contributing in line with their specific expertise.
When we consult Xtract One’s financials, the thesis checks out, with the company more than quadrupling revenue from C$3.6 million in 2022 to C$16.3 million in 2024, while cutting net losses from C$39.7 million to C$11.06 million, respectively, with a backlog of C$53 million as of Q1 fiscal 2026 setting the company up for what leadership believes will be a transformational year ahead.
4. Fit your AI stock into your asset allocation and overall financial plan
Now that you’ve sized up your AI stock from asset, financial and leadership perspectives, your attention should now turn inward to determine whether or not it fits within your financial plan. Practically speaking, this means:
- Assessing how risky the stock is, expressed in terms of beta, a measure of potential gains and drawdowns, listed for all companies on Stockhouse.
- Comparing the figure with your risk tolerance, or how much volatility you are willing to put up with as the company puts its growth initiatives in motion.
- Deciding on position sizing and time horizon within your chosen asset allocation, optimizing for a satisfactory outcome in line with your financial goals.
A guiding light to keep in mind here is that, the better an AI stock on your watchlist matches up with numerals 1-3, the greater the conviction it deserves to withstand a potential bubble bursting and eventually regain its footing.
That said, investors should be prepared to hold any stock over the long-term before return expectations come into view, with Fidelity recommending 7 years and Canada Life highlighting the benefits of a 10-year time horizon.
5. Sell opportunistically to fund your financial goals
Despite financial media’s tireless focus on top-returning stocks, the purpose of investing is not to keep score but to fund your vision of a good life. Consequently, unless you plan to pass your AI stocks on to your grandkids, you should sell them when the right time comes around for a major purchase or desired experience, taking care to choose which holdings you’ll sell based on tried and true rules of thumb that ensure you’re minimizing money left on the table.
Firstly, consider a stock’s valuation, referenced in numeral 2, and whether or not its current price is cheap or expensive relative to what the broader AI market is trading for, favoring richer multiple for a sale whenever possible.
You should also think about the taxes you may have to pay resulting from any capital gains. If you hold your AI stocks in a taxable or non-registered account, the Canada Revenue Agency expects you to add half of the capital gains from each sale to your income for the given year. If you hold them in an Registered Retirement Savings Plan or RRSP, any withdrawals you make from the account will be added to your income in that given year. Remember that, to avoid penalty fees on your withdrawals, you must convert your RRSP into a Registered Retirement Income Fund first, which sets the account up to be liquidated yearly at an accelerating pace, a move you should make only when you’re ready to retire.
Then there’s a stock sale for the purposes of rebalancing, which is warranted when a position gets too big to properly fit within your asset allocation. For example, if your AI stocks grow to 20 per cent of your portfolio, when 5 per cent is your limit, the rational decision would be to take 15 per cent off the top and reinvest it into an underallocated sector or asset class.
Finally, if the company underlying your AI stock undergoes a fundamental change to its business plan, such as bankruptcy, new management or a failed flagship project, making it incompatible with why you bought it in the first place, you should sidestep the behavioral bias of loss aversion, or holding onto your losers, and redirect any remaining funds into the next stock on your watchlist.
While the average investor may react in fear and sell a stock prematurely, follow these fundamentals, and you’ll never find yourself among them.
Now that you have a framework to guide you through the investment lifecycle, from due diligence to disposition, all that’s left is to put your skills to the test, meaning you may be interested in expanding your watchlist beyond the trio of stocks I used as examples throughout the article. To that end, here are three recent articles to get you started:
- Two tanking AI stocks undervaluing profitable businesses.
- 10 best-performing AI stocks for Canadian investors.
- The top 10 artificial intelligence penny stocks.
Join the discussion: Find out what investors are saying about AI stocks and a potential bubble on the Innodata Inc., Nextech3D.AI Corp. and Xtract One Technologies Inc. Bullboards and make sure to explore the rest of Stockhouse’s stock forums and message boards.
Stockhouse does not provide investment advice or recommendations. All investment decisions should be made based on your own research and consultation with a registered investment professional. The issuer is solely responsible for the accuracy of the information contained herein.
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