I believe the next few quarters will be a harsh reality for many AI stocks. Many of these stocks are detached from their underlying business fundamentals. Hype and speculation, not revenues and profits, are driving their valuations.
We’ve already seen the bubble burst for some AI startups, with stock prices plummeting from high highs and company valuations dropping back to reality, and we expect this trend to continue and spread to other overvalued companies.
Once the initial enthusiasm dies down, investors start looking again at the numbers, and for many AI companies, the numbers simply don’t add up: without similarly strong financial performance, exorbitant valuations can’t be sustained.
So if you own these stocks, we recommend selling them while you still can. Let’s take a closer look and see why these stocks’ best days are already behind us.
SoundHound AI (SOUN)
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SoundHound AI (NASDAQ:SOUN) shares have been soaring in 2024, up 164% year to date and 41% in July alone, but I believe a major correction is on the way. The voice AI company has been riding the artificial intelligence hype, reaching a market cap of $1.8 billion, even as it faces stiff competition from tech giants with established voice recognition technology.
SoundHound’s products don’t seem differentiated enough to justify an inflated valuation of 26 times expected sales, especially in the absence of profits. The company’s first-quarter revenue grew 73% to $11.6 million, but its net loss increased 20% to more than $33 million. Analysts are becoming skeptical, and DA Davidson recently downgraded the company’s shares due to valuation concerns.
SoundHound’s stock price is likely to see a dramatic decline as the AI craze inevitably cools off. The company will need to prove it can carve out a profitable niche against larger rivals to command the current premium. For now, I would stay away from this overvalued AI stock before the music stops.
BigBear.ai (BBAI)
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BigBear.ai (NYSE:BBAI) has been a big disappointment in the AI sector this year. I believe the stock has been one of the most volatile in the space, and most importantly, the company has struggled to keep up with its AI peers due to serious fundamental flaws. BBAI shares have seen several spikes during the AI boom, but are still down about 25% year to date.
In my view, BigBear.ai will likely go bankrupt at some point. There are no near-term profits in sight, and the company is burning through cash at an alarming rate. BigBear.ai reported a staggering net loss of $125 million in the most recent quarter alone. Additionally, as of Q1 2024, the company only has $81.4 million in cash remaining on its balance sheet. Even if it survives, the company’s financials do not justify a premium valuation.
There’s little reason for optimism. BigBear.ai faces significant headwinds and its AI-powered analytics platform has failed to gain significant traction. Investors should steer clear of this struggling AI laggard.
Teradyne (TER)
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Teradyne (NASDAQ:TER) shares have been soaring recently, up nearly 60% since bottoming out in April. The automation equipment maker appears to be riding a wave of companies racing to automate the logistics industry. But I have my doubts.
First, Teradyne’s financials aren’t as strong as its stock price: In fact, its first-quarter 2024 revenues were down about 3% year over year, and even bullish analysts expect growth to slow sharply over the next two years.
Second, insiders are selling stock. Director Johnson Mercedes recently sold $90,000 worth of stock. This is hardly a vote of confidence. Furthermore, the valuation of the stock seems way too high to me. Teradyne’s stock is trading at a whopping 50 times forward earnings and 9 times sales. This is extremely expensive for a slow-growth industrial automation company, with or without the AI hype.
Teradyne is expected to experience strong growth for the next two years or so, after which growth is expected to slow sharply. Therefore, the stock has likely peaked for now. Investors chasing this momentum stock at these skyrocketing levels may be in for a sore disappointment.
As of the date of publication, Omor Ibne Ehsan 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 author in accordance with InvestorPlace.com’s Publishing Guidelines.
On the date of publication, the editor in charge did not hold (either directly or indirectly) any positions in the securities mentioned in this article.
Omor Ibne Ehsan is a writer for InvestorPlace. A self-taught investor, he focuses on growth and cyclical stocks with strong fundamentals, value, and long-term potential. He is also interested in higher risk, higher reward investments such as cryptocurrencies and penny stocks. You can follow him on LinkedIn.
