With stocks with high exposure to the artificial intelligence mega-trend pulling back recently, now may be the time to make an exit from overvalued AI stocks.
Since late last year, when the launch of OpenAI’s generative AI chatbot ChatGPT kicked off a massive move by big tech into this new digital frontier, investors responded by jumping into these stocks. Shares in smaller AI/machine learning companies also surged higher.
In the ensuing months, many of these stocks reached rich valuations. Excitement about this secular growth trend was more-than-enough to outweigh any valuation concerns. Yet now, this may no longer be the case.
Why? Instead of merely being a possible bubble on the verge of popping, said bubble may already be deflating. Valuation concerns are rising. The market is realizing that the economic boom to be produced by the rising use of AI applications is likely years away from happening.
If you hopped on the artificial intelligence bandwagon earlier this year, now may be the time to cash out. That is especially the case, if you happen to currently own these seven overvalued AI stocks. Each one is at risk of experiencing steep declines.
C3.ai (AI)
C3.ai (NYSE:AI) has become one of the top ways to play the aforementioned trend among retail investors since the start of 2023.
Factors such as its ticker symbol, as well as the enterprise AI software company’s small size (suggesting outsized growth potential) may explain this.
AI stock is up nearly threefold since January. That’s when C3.ai launched its C3 Generative AI Product Suite. Between this new product, and the company’s pivot to a consumption-based rather than purely subscription-based model, there has been rising speculation that, after years of experiencing growth and profitability challenges, better results are on the horizon.
But as mentioned above, the popularity of AI plays is waning. Shares have pulled back sharply so far this month. If investors continue to become less willing to buy AI stocks at any price, C3.ai stock could give back the rest of its 2023 gains.
Advanced Micro Devices (AMD)
You may question why I think Advanced Micro Devices (NASDAQ:AMD) is one of the overvalued AI stocks. After all, isn’t AMD’s top chip rival Nvidia (NASDAQ:NVDA) even pricier? Yes, this is true.
AMD stock trades for 40.5 times forward earnings, while NVDA currently sports a forward multiple of 55. Yet while cheaper, keep in mind that, while Nvidia has already capitalized on the AI chips trend, for this semiconductor company, as I have argued previously, capitalizing on AI remains a work in progress.
If “AI mania” continues to simmer down, AMD’s non-AI headwinds (due to still-weak demand among end-users like gaming) may be starting to become top of mind again. This could push moderately-pricey Advanced Micro Devices shares back on down to lower valuation. Downside risk may not be extremely high, but with AMD, you may still want to sell/avoid for now.
Lemonade (LMND)
Earlier this month, I pointed out how Lemonade (NYSE:LMND) was one of the AI-related stocks with a very high level of short interest. This makes sense, as it doesn’t take long to realize that this is one of the overvalued AI stocks to sell.
Yes, LMND stock, even at the height of its summer AI rally, failed to get anywhere close to the substantially higher prices it traded for during late 2021. Back then, shares in this fintech company, which uses AI to underwrite insurance policies, traded for triple-digit prices.
Not only that, more recently, LMND has coughed back almost all of its 2023 gains. So then, why does this stock still belong on your sell list? Richly priced given its continued unprofitability, and as recent results suggest this issue will persist, the Lemonade sell-off may continue in the near-term. This makes LMND a clear sell today.
UiPath (PATH)
Similar to AMD, UiPath (NYSE:PATH) may initially not seem like one of the particularly overvalued AI stocks.
Shares in this company, which has started to integrate generative AI features into its robotic process automation (or RPA) platform, trade for 45.6 times earnings.
But while not super-expensive, PATH stock may be at risk of multiple compression. Why? Beyond the deflating of AI plays, there is also the risk that the market realizes that PATH isn’t really an AI stock.
As analysts from Wells Fargo pointed out, in their downgrade of the stock in June, adding AI features to its RPA-focused platform still does not eliminate the risk of end-users shifting more towards purely AI-based automation platforms, hurting future growth.
If subsequent results/guidance from the path give credence to this bear case, PATH shares may experience a de-rating, creating high losses for anyone deciding to keep holding the stock.
Palantir Technologies (PLTR)
After entering a slump in 2022, and staying there until May 2023, shares in Palantir Technologies (NYSE:PLTR) have experienced a resurgence in popularity.
Speculators have been placing their bets that this provider of advanced analytics software for governmental and commercial end-users will receive a growth boost from the rise of generative AI.
However, since the company’s last earnings report, this excitement has cooled down for PLTR stock. Mainly, because of disappointment with Palantir’s updates to outlook. Skyrocketing AI demand isn’t exactly translating into a growth bonanza.
Trading for above $20 per share ahead of earnings, PLTR has dropped back down to around $15 per share. Still, don’t buy this dip.
Continue to consider it one of the AI stocks to sell. Richly-priced at 66.8 times forward earnings, its valuation could keep coming down, given that AI isn’t as strong of a growth booster as once expected.
Rekor Systems (REKR)
Lately, Rekor Systems (NASDAQ:REKR) has become one of the more popular AI penny stocks.
Trading for around $2.40 per share, many investors believe that there’s massive upside with shares in this provider of AI-powered software used for transportation management and public safety.
To some extent, I can understand the excitement for REKR stock. As seen in the company’s latest financial results, revenue is growing at a triple-digit clip. Yet while revenue may be skyrocketing, Rekor continues to report big losses. Even on an adjusted EBITDA basis, it is losing money.
That’s not all. With just $2.5 million in cash on hand as of June 30, chances are Rekor will raise more cash, through the sale of additional shares. With this, consider this one of the overvalued AI stocks, as REKR’s current valuation likely does not fully price-in the prospect of future shareholder dilution.
Symbotic (SYM)
Symbotic (NASDAQ:SYM) uses AI to develop and operate fully-automated warehouses for large retailers.
After trading sideways for nearly a year after its stock market debut, SYM has really taken off in recent months.
Admittedly, it hasn’t just been “AI mania” driving up this big run-up for SYM stock. Improving results have played a large role as well. However, as my InvestorPlace colleague Muslim Farooque recently pointed out, recent strong growth (including a 77.6% year-over-year jump in revenue last quarter) is likely more than accounted-for in SYM’s valuation.
Farooque isn’t the only one noticing this. Right after Symbotic’s latest earnings release, William Blair analyst Ross Sparenblek downgraded the stock, citing that the company’s outlook seems “fully priced in,” as well as the fact that “valuation appears stretched.”
If AI mania is truly over, those still holding SYM could face big losses if they decide not to sell ASAP.
On the date of publication, Thomas Niel did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
