Under the view that the artificial intelligence mega-trend that emerged earlier this year has become an “AI bubble,” many on the short side have placed wagers against popular plays in the space. This has resulted in a growing number of AI stocks with high short interest.
The question now, however, is whether to follow the short side’s lead, or fade their big bearish bets. On one hand, following their lead could prove worthwhile.
If AI stocks are truly in a bubble, and said bubble bursts (like all prior economic bubbles have done), this may mean outsized profits for those shorting them at today’s prices.
Despite the short-side’s “smart money” reputation, there may be the potential for some of these heavily-shorted AI stocks to experience a short-squeeze.
With this, let’s take a look at seven AI stocks with high short interest, and see whether you should follow the short side’s lead.
C3.ai (AI)
Alongside big tech names like Nvidia (NASDAQ:NVDA) and Microsoft (NASDAQ:MSFT), C3.ai (NYSE:AI) is one of the most widely-followed AI stocks.
AI stock is up a staggering 254.8% so far in 2023. There is a debate whether this massive move higher was justified given the underlying trend, or if this run-up is merely the product of AI hype.
With factors like C3.ai’s disappointing earnings outlook pointing to the latter rather than the former, it’s no surprise this stock has become, and remains, one of the high short interest AI stocks.
According to Fintel, 34.6% of AI’s outstanding float has been sold short. While an epic short squeeze is in theory possible, as my InvestorPlace colleague David Moadel recently argued, C3.ai has poor fundamentals, and its AI catalyst appears priced-in.
This suggests looking at skipping this AI play, and pursuing stronger opportunities.
Bullfrog AI Holdings (BFRG)
Bullfrog AI Holdings (NASDAQ:BFRG) is far less known than C3.ai, but it too has become one of the AI stocks with high short interest.
According to Fintel, around 15.4% of the outstanding float of this hybrid AI/biotech play have been sold short.
Reviewing BFRG’s fundamentals, the short side’s skepticism makes sense. In theory, the company’s proprietary AI and machine learning platform could provide an edge in the high stakes world of biotechnology.
Whether this will translate into big gains for investors in BFRG stock, however, remains to be seen.
Currently generating zero revenue, and with just $5.4 million in cash on hand as of March 31, 2023, Bullfrog will likely need to raise substantially more cash over time to sustain itself until it (possibly) becomes a large, profitable business. The dilution resulting from this could water down long term returns for BFRG shares.
DigitalOcean Holdings (DOCN)
After looking at two AI stocks where the short side’s bearishness appears warranted, here’s yet another one where short sellers have appeared to make the right call, DigitalOcean Holdings (NYSE:DOCN).
Since DOCN stock moved higher because of perceived AI exposure, the skeptics have laid out a substantive bear case. For instance, back in June, Piper Sandler analyst James Fish pointed out several factors that make this cloud software company a bad AI wager.
That’s not all. On Aug. 3, as part of its earnings release for Q2 2023 (ending June 2023), DigitalOcean revealed that it made accounting errors in preparing its Q1 2023 results, and therefore would need to issue an earnings restatement.
DOCN fell by nearly 23% following this news, yet as there are red flags surrounding the company’s financials, not just its AI catalysts, a further slide for shares may lie ahead.
Lemonade (LMND)
During the pandemic-era frenzy with speculative growth stocks, Lemonade (NYSE:LMND) one of the most popular plays out there. During this time (late 2020/early 2021), shares in this company, which uses AI to underwrite property and casualty (or P&L) insurance policies, traded for prices north of $175 per share.
Today, LMND stock trades for about a tenth of such prices, but the short side continues to bet against it. With shares rising by around 26% since January due to “AI mania”, Lemonade has become one of the AI stocks with high short interest.
According to Fintel, 23.2% of LMND’s outstanding float has been sold short. So far, Lemonade has underwhelmed in its goal to “disrupt” the P&L insurance space. With high net losses expected to persist until at least 2025, LMND could experience a big reversal, when (not if) “AI mania” finally fades.
MicroVision (MVIS)
On the surface, calling MicroVision (NASDAQ:MVIS) an AI stock seems like a stretch. However, shares in this maker of lidar (light detection and radar) sensors for self-driving vehicles have been boosted by the excitement about the rise of AI.
As InvestorPlace’s Thomas Yeung pointed out back in June, similar to how Nvidia is a “picks and shovels” play on generative AI, MVIS stock might be a similar sort of play when it comes autonomous vehicles, another AI-related trend. Yet as Yeung also pointed out, speculators making this wager are likely mistaken.
Mostly, because of MicroVision’s poor fundamentals/underwhelming success thus far in the lidar space. Hence, the short side is likely on the money, when its decision to short MVIS. According to Fintel, 22.7% of MVIS’s outstanding float has been sold short, although short interest has dropped in recent weeks.
Upstart Holdings (UPST)
“AI mania” has given Lemonade a moderately high lift, but it has really provided a boost for another AI-connected fintech stock: Upstart Holdings (NASDAQ:UPST). As you may know, Upstart uses an AI-powered algorithm to assess credit risk.
Those bullish on Upstart contend that this alternative underwriting method could become widely used by lenders. UPST stock tanked in 2022, as concerns about a hard economic landing began to rise. In 2023, though, the AI trend, plus easing recession fears, have sent shares back up by five-fold.
UPST is also one of the AI stocks with high short interest (36.5% of float). However, note that Upstart has long had high short interest. I’ve argued previously that UPST is a buy on weakness, as it could ultimately prove the skeptics wrong. While you should tread carefully, it may pay to go contrarian if shares take a big dive from here.
Veritone (VERI)
Admittedly, for short interest in AI stocks, Veritone (NASDAQ:VERI) doesn’t rank too highly. Per Fintel, short interest for this AI company comes in at only 12.2%. Still, you may be concerned about VERI for another reason.
Unlike the AI stocks mentioned above, there’s been little AI enthusiasm for VERI stock in 2023. In fact, shares are down by more than 20% this year. With both the long and short sides feeling “meh” about the stock, I bet you’re thinking, “why take any position at all?”
While out of favor for now, recent company moves could help to improve sentiment down the road.For instance, a recent bolt-on acquisition of an AI-driven human resources services provider that could lead to growth/cost synergies. If moves like this enable Veritone to narrow losses/swing towards profitability, a big rebound for VERI may be in the cards.
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.
