Investors looking for overrated AI stocks to sell are in luck this year, as many hyped-up AI names are likely trading at or near their peak. Even using the most optimistic metrics, most AI stocks are simply too overvalued to be considered a buy, and many will inevitably tumble from this range.
Now don’t get me wrong, AI is an up-and-coming sector and one that will definitely have a massive impact a few decades from now. However, it is still a niche technology with limited use cases within some white-collar industries. It is far from becoming the next Google (or replacing it), and is currently a loss-producing segment. In fact, Bing’s AI integration only increased Google’s market share in the search engine market.
With that in mind, taking profits or selling off some of the hottest AI stocks is a good idea. Here are three overrated AI stocks to sell.
| NVDA | Nvidia | $385.10 |
| AI | C3.ai | $36.22 |
| AMD | Advanced Micro Devices | $121.05 |
Nvidia (NVDA)
Nvidia (NASDAQ:NVDA) has a valuation that is impossible to justify using any traditional valuation metric, and going long on this stock is beyond dangerous at this stage in the cycle. This company has shrinking top- and bottom-lines, down 13% and 21%, respectively, on a non-GAAP basis year-over-year. Net income is still up 26% on a GAAP basis, but it is nowhere near its post-Covid metrics prior to 2022. Indeed, the hype around AI has certainly had its impact on this stock’s recent performance. But this hype isn’t likely to last.
Yes, the company has a strong foothold in the AI chips industry. However, it is important to consider that there are strong competitors in this market. AI chips can and will be a massive industry in the future, but with Advanced Micro Devices (NASDAQ:AMD) and Microsoft (NASDAQ:MSFT) partnering up, will Nvidia hold onto its dominance until then? The answer is no. Intel (NASDAQ:INTC) and Alphabet (NASDAQ:GOOG) are also top contenders in this AI chip space, and Google’s chips are already outperforming Nvidia’s.
Again, I’m not saying that Nvidia is a lost cause. But investors shouldn’t touch this stock with a ten-foot pole until a substantial valuation adjustment. Cathie Wood perfectly describes NVDA stock as “priced ahead of the curve.”
C3.ai (AI)
C3.ai (NYSE:AI) is the lucky company with the much-desirable “AI” ticker. Perhaps that is the only reason this stock trades at a ridiculous price-to-sales ratio of 15.7-times, worse than 91.43% of its software peers. Sure, it has some solid partnerships (which is arguably its greatest strong point) with many major companies in various sectors, but these partnerships are insignificant in terms of revenue generation and profit.
Looking at the company’s revenue estimates, even by 2026, sales growth will be in the 20% range with measly profits. Even if we fast forward to the year 2026, a $4.1 billion valuation for this company is simply excessive.
Accordingly, analysts agree there is an average 31.5% downside potential by next year. Smaller analyst firms primarily drive these high targets. I agree with Morgan Stanley and BoA’s recent price targets in the range of $12-16 as fair for this stock, implying 63% downside at the midpoint of this range.
Advanced Micro Devices (AMD)
While I did say that Advanced Micro Devices can become a significant contender to Nvidia, AMD stock is also priced ahead of the curve right now. It is up 122% from its trough right now, meaning profit-taking may be the smartest decision when thinking about how to handle this winner.
Now, the downside risk here is likely much lower than that of Nvidia. But it doesn’t necessarily mean that you should blindly hold the stock. Moving in and out of investments is an excellent way to play the current AI hype. Advanced Micro Devices is expected to continue to see shrinking sales, while analysts expect earnings per share to decline by 17.7% this year. This will likely overlap with a cooldown in AI-related stocks, and bring about a sharp decline in AMD stock.
Analyst forecasts project a median 20% downside in AMD by 2024. Thus, now may be a good time to shift to stocks with better valuations and growth prospects for the time being.
On the date of publication, Omor Ibne Ehsan did not have (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.
