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The recent global stock market downturn has certainly concerned many investors, with companies like Nvidia ( NASDAQ:NVDA ) leading the way lower with significant underperformance tied to its own headwinds, as well as those of the market. Recessionary fears are now growing, as macroeconomic reports continue to show cracks growing within the employment market and certain areas of the economy. As such, some investors are beginning to question the incredible valuations many top AI stocks have received in recent quarters on the basis of simply suggesting they're going to pivot into new AI lines of business or integrate AI technology within their existing business models.
For other companies that are AI-centric, this potential capital flight away from AI into other areas of the economy could provide a big headwind on the horizon. The following three stocks on this list are ones I think investors would be better off selling, particularly if the market headwinds continue to pick up.
Key Points About This Article:
- AI stocks have been surging in recent quarters for a number of reasons, but that multiple expansion story may be shifting.
- These three companies could be among the stocks to avoid by investors who are concerned about a more full-fledged downturn in this space.
- If you’re looking for some stocks with huge potential, make sure to grab a free copy of our brand-new “The Next NVIDIA” report . It features a software stock we’re confident has 10X potential.
BigBear.ai (BBAI)
A black bear resting its chin on a log
BigBear.ai ( NYSE:BBAI ) shares have struggled, down nearly 34% in 2024 after the company reported disappointing first-quarter update. Despite its AI focus on national security, digital identity, and logistics, concerns linger over the company's recurring losses and significant debt, warranting investor caution.
Although its AI solutions and high-profile U.S Army contract s are commendable, Bigbear AI struggles on the financial front. The company's surge in February, which was largely tied to hype in the overall market, has been short-lived. The company has since reported revenue that's declined 21% on a year-over-year basis as well as a $125 million operating loss. Those are the kinds of numbers many growth investors simply can't ignore.
The company has seen strong competition from other major players in its core businesses, with Palantir Technologies among the top competitors investors are concerned about. It's my view that over the long-term, Palantir could win out in many respects, and BigBear.ai certainly has its work cut out for it to carve out its own niche in this space. Many analysts have pointed out that poor relative execution and a high cash burn rate could pose hurdles for the company, particularly as it remains overvalued on a debt to cash basis (more than $200 million in debt and $81 million in cash).
Thus, BigBear.ai could have just a couple quarters to figure out its operating model, or have to seek additional financing. Plainly put, that wouldn't be great for investors. It's my view this is a stock to avoid here.
C3.ai (AI)
An AI PC
C3.ai ( NASDAQ:AI ) is a smaller AI software firm, but is one that's simply not growing fast enough for most investors to get excited about. The company reported a measly 6% revenue increase in fiscal 2023, but like BigBear.ai, faces stiff competition and dependency on a key deal expiring in April. Its new pricing model has hurt subscription fees, though revenue has grown 16% thus in fiscal 2024 . This revenue growth acceleration is a positive, and analysts are suggesting it could continue. But if it doesn't, there are air pockets below that could be filled, and that's enough to make some investors wary.
C3.ai's operating loss of $82.3 million is significant, and highlights some of the company's operating inefficiencies within its overall cost structure. Additionally, the company's shift from subscription to consumption-based pricing creates revenue instability and affects customer retention. With relatively a poor stock performance compared to tech peers and growing skepticism about profitability amid fierce competition, investor confidence is fading in this once hyped-up name.
In my view, C3.ai is too overvalued relative to its forward-looking prospects. Analysts seem to agree, with a consensus ratings of hold on AI stock.
SoundHound AI (SOUN)
SoundHound AI header
Rounding out this list of AI stocks to sell is SoundHound AI ( NASDAQ:SOUN ), a company with nearly 20 years of market experience in then voice and speech recognition markets. The company had previously seen robust revenue growth in the post-pandemic environment, but that's dissipate of late. And the company's rather inflated $1.7 billion valuation seems to be unjustified, given the company's ongoing lack of profitability and fierce competition from major tech giants such as Amazon and Alphabet.
The company has secured notable clients, but is overvalued relative to its fundamentals. Right now, what investors care about is fundamentals. And despite Nvidia's recent investment in the company, one could argue that any sort of gains the stock has made following this announcement have priced in most of the company's future upside. Indeed, I think the argument could be made that Nvidia's minor stake in the company is unlikely to have an impact on SoundHound's overall stability, particularly given the fact that the DOJ is reportedly probing the company for its recent AI investments.
If Nvidia is forced to take back its investment in SoundHound, or if the company continues to struggle to capitalize on the generative AI boom, this is a stock that could have a lot further to decline from here.
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