Over the past year or so, we’ve witnessed the rise of artificial intelligence. It’s in the news, big companies are incorporating it into their processes and it’s slowly making its way into everyday life as well.
But now the hype around the sector is beginning to reach a fever pitch.
For example, FactSet released a report detailing the number of companies citing AI on their earnings calls over the past 10 years. During the most recent quarterly earnings calls, it found that 179 companies mentioned AI. This is well above the five-year average of 73 and the 10-year average of 45.
As the chart below shows, the second and fourth quarters of 2023 were the peak for AI mentions in earnings calls.
Source: FactSet
Now, a lot of these companies are simply taking advantage of the AI hype, looking to impress analysts and investors. But it is important to note that not every AI stock is created equal. And right now, investors seem to be forgetting that.
One of the most common mistakes investors are making right now is investing in any company that has AI in its name and not focusing on the stock’s fundamentals. And this is a recipe for disaster.
So, in today’s Market 360, we’re going to talk about a stock that’s being driven up purely by AI push. I’ll share why I think this is a big mistake, and where you can find fundamentally superior stocks you can feel confident investing in.
The SoundHound Bubble
There is one company I have noticed recently that many are buying into due to the AI excitement: SoundHound AI (SOUN).
SoundHound is a voice AI and sound recognition company. Based in Santa Clara, California, it provides AI-powered voice technology for cars, TVs, smart home appliances and restaurants.
Now, since the beginning of the year, SOUN has been on quite a run – recently hitting a high of $10.25. In fact, it has surged over 250% since early February!
But I firmly believe this surge is not organic, as it doesn’t have the superior fundamentals needed to maintain its momentum. In fact, according to Forbes, six factors point to the stock rising too far, too fast:
- Disappointing fourth-quarter financial report
- Intense competition
- High cash burn rate
- Dodgy financial statements
- Excessive valuation
- And a spike in bearish bets against the company
The good news is the company’s first quarter sales are forecasted to grow 50.6% to $10.1 million. The bad news is that analysts expect it to post an earnings loss of $0.09 per share. That compares to an estimate for an earnings loss of $0.07 a couple months ago. When the analyst community is lowering their consensus earnings estimate, that is not a good sign.
In fact, SoundHound posted a 16.7% earning miss in the fourth quarter. Not to mention that the company has a market capitalization of $2.18 billion, but only has an annual forecasted 2024 revenue of $69.5 million. In other words, SoundHound trades at 31.3 times forecasted 2024 revenue.
So, while revenue is growing rapidly, the company is still losing money. And with only $95 million of cash on the balance sheet, SoundHound will need to turn the ship around quickly.
I should also add that the stock has been frequently mentioned on WallStreetBets, a popular forum on Reddit. In case you don’t recall, this is the same place where a group of investors engineered a massive short squeeze on GameStop Corp. (GME) in 2021.
Now, that particular episode may have been fun to watch. But WallStreetBets is also a hotbed of aggressive trading, where investors often collude with one another to pump up the share price of a stock. This sort of trading activity is dangerous.
This AI stock is obviously a “pump & dump” stock, and I expect its bubble to burst.
Looking for AI Stocks? Focus on the Fundamentals
I’ve said it before, and I will say it until I am blue in the face… you should only be investing in fundamentally superior stocks. No matter what company it is or what sector it is a part of, if you are invested in a stock with superior fundamentals, you can feel confident that its rise is not because of a pump and dump scheme, but rather because its fundamentals are supporting its growth.
Unfortunately for SoundHound, it does not have the fundamentals to back up its growth, and that will eventually catch up to its stock.
So, instead of blindly throwing your money at a company with AI in its name, you need to make sure they have superior fundamentals.
With that in mind, I have found five stocks that I expect to lead the charge as AI explodes – all of which I recommend in my Breakthrough Stocks service. New subscribers will receive my brand-new special report: 5 Small-Cap Gems for the 2024 A.I. Boom. These are five companies that are properly incorporating AI into their businesses or stand to profit directly from AI, as well as strong fundamentals.
And just as there will be big AI winners, there will also be real losers… So, to help you avoid them I will also send you another brand-new report – The A.I. Landmines: 3 Stocks to Avoid in the Age of A.I. These companies could get left in the dust in the AI race. Given their popularity, you’ll want to make sure you don’t have these ticking time bombs in your account.
You’ll also have full access to my Breakthrough Stocks Portfolio, all my Weekly Updates, Monthly Issues, Special Reports, Special Market Podcasts – and much more.
(Already a Breakthrough Stocks member? Click here to log in to the members-only website now.)
Sincerely,
Louis Navellier
Editor, Market 360
