Artificial intelligence (AI) stocks are one of the hottest trends of the year, and with good reason. Almost every week, it seems, we see some exciting new development with AI-powered text, images and even animation. But amid the hype, there are a number of overvalued AI stocks that are ripe for a sell-off.
AI is starting to have a disruptive impact on the old-world economy. Shares of student education company Chegg (NYSE:CHGG) plunged 48% in a single day this week following a downbeat earnings report and a warning that ChatGPT was causing significant pain to Chegg’s business. As we see more real-world consequences from artificial intelligence, the demand for AI stocks should only grow.
However, not all the companies in this industry necessarily represent great value at today’s prices. In fact, the three overhyped AI stocks to sell below could see significant declines in the coming months. AI will be a booming industry, but that’s no excuse to hold these overvalued AI stocks today.
C3.ai (NYSE:AI) is one of the most popular AI stocks out there, as evidenced by its average daily trading volume of 24.5 million shares. It’s become a de facto way to take a bullish or bearish view on artificial intelligence as a concept.
Year to date, shares are up 55.5%. Unfortunately, the “AI” ticker symbol is doing much of the heavy lifting here. C3.ai’s actual business is a form of artificial intelligence, but it’s far from what most people probably imagine when they hear the term.
Instead of cool consumer applications such as text or image generation, C3.ai is involved in big data analysis. Its systems sift through tons of information and make predictions about future operations. This allows for predictive maintenance.
For example, give C3.ai years of data about a factory, refinery, aircraft or other such item and it can forecast when parts will break, allowing technicians to fix things in advance, saving money, reducing downtime and improving efficiency.
This is no doubt a highly valuable service, but it’s not glamorous. Key customers are firms such as oil companies and the Air Force. Over many years, C3.ai can probably build a successful enterprise. But anyone expecting C3.ai’s stock price to continue to surge in 2023 based on consumer AI excitement is probably going to be disappointed.
BigBear.ai Holdings (BBAI)
BigBear.ai Holdings (NYSE:BBAI) is a firm that has a lot of similarities with C3.ai. It has AI in its name and it offers predictive tools to industrial firms and the Defense Department.
BigBear.ai is arguably even riskier than C3.ai, though, as BigBear.ai came public via a special purpose acquisition company ( ). Initially, there was no demand for BBAI stock, with its shares plummeting from around $10 in May 2022 to a low of 58 cents by the end of the year. With the artificial intelligence excitement in 2023, however, BBAI stock surged as much as tenfold.
The problem? Profitability. BigBear.ai has a decent revenue base at around $155 million over the trailing 12 months. But it is losing lots of money on an operating basis. And revenue is growing slowly, with analysts projecting a 4% increase this year and 10% next year.
Predictive analytics just isn’t a fast-moving category that can support the sort of high valuations traders are assigning to AI stocks today. Throw in a shaky balance sheet and BigBear.ai is not a worthy AI industry selection.
There’s another category of AI stocks to sell. It’s the one where a company is a true leader in the artificial intelligence space, yet its valuation no longer makes sense even in the context of its AI ambitions. Nvidia (NASDAQ:NVDA) is the classic example.
It’s no secret that Nvidia is producing the chips and advanced engineering necessary to power the next leg of AI innovation. It will be a large and fast-growing market for the company for many years to come.
But that’s all baked into the price and then some. With this year’s blistering 90% run-up, NVDA stock is now trading for about 60 times forward earnings and more than 25 times revenue. These are wild multiples for a company that merely saw flat revenue this past year. The intermediate-term outlook is also doubtful amid renewed price cuts in the graphics card arena.
Almost no one would dispute that Nvidia will have a large and highly profitable AI business over time. But NVDA is likely to be a poor investment from the current entry point even given that fact. Morningstar’s Abhinav Davuluri pegs the stock’s fair value at just $200 a share, 28% below where it trades today.
On the date of publication, Ian Bezek 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.