Investors are now more cautious about AI spending and potential returns, focusing on cash flow, debt, and market position. Despite froth in the sector, there is a clear leader trading at a reasonable price. Predictions of an AI bubble bursting have not yet come true, but analysts are now examining debt levels and funding capabilities to determine winners and losers in the AI space.

Retail investors should diversify their AI holdings as good companies may have been bid up too far. Microsoft, for example, saw a drop in shares due to extraordinary AI spending affecting profitability. While a mix of AI-related stocks makes sense, consider anchoring the portfolio with a clear leader like Nvidia, which expects significant long-term growth opportunities due to increased AI infrastructure spending.

When considering buying Nvidia stock, note that it was not among the 10 best stocks identified by The Motley Fool Stock Advisor team. However, the company is expected to benefit from the growth in the AI sector and is trading at a reasonable valuation. Diversifying with Nvidia as an anchor holding in a portfolio of AI-related stocks could be a wise move for investors looking to capitalize on the AI market’s potential.

Read more at Nasdaq.: The AI Frenzy Is Cooling. Here’s What Smart Investors Should Do Now.