Given the hype surrounding artificial intelligence, it’s hard to imagine that there are any AI stocks to sell. They’ve all got to be good, no?
The reality is, like every other industry or segment, there are good and bad stocks to buy and sell. That’s life.
I’ve been tasked with coming up with three AI stocks to sell in May before they crash and burn. An excellent place to start would be the holdings of the Global X Robotics & Artificial Intelligence ETF (NYSEARCA:BOTZ), companies that benefit from robotics and AI. The ETF’s website says the global robotics market could be worth $280 billion by 2032, suggesting that it is more focused on robotics than AI.
Nonetheless, the ETF has 43 holdings, and there’s got to be three that don’t pass the sniff test. Here are my picks to sell now.
Nvidia (NVDA)
Nvidia (NASDAQ:NVDA) is one of my favorite stocks. CEO Jensen Huang has built a business that isn’t afraid to make big bets. AI is the latest bet, and its latest move will probably make Huang the wealthiest person on the planet.
So, why sell?
Although its share price has retreated from its all-time high of $974 hit in March, it is still up 88% year-to-date, 210% over the past year, and over 2,000% in the past five years. Not even Tesla (NASDAQ:TSLA) has come close to its performance since May 2019.
One sign investors might be fighting Nvidia fatigue is that billionaire Stanley Druckenmiller said on May 7 that he would cut his stake in the AI chip maker in 2024.
“We did cut that and a lot of other positions in late March. I just need a break. We’ve had a hell of a run. A lot of what we recognized has become recognized by the marketplace now,” Druckenmiller said while appearing on CNBC.
Druckenmillier likes Nvidia, or he would have sold entirely. His Duquesne Family Office held 617,494 shares as of December 31, 2023. The shares are worth $558 million or 17% of its $3.35 billion portfolio.
Cognex (CGNX)
Cognex (NASDAQ:CGNX) provides machine vision products and solutions for industrial companies. These products include vision systems, barcode readers, 3D vision products, and software.
Suggesting you sell CGNX stock after it reported Q1 2024 results that exceeded Wall Street expectations — revenue was $211 million, 5.2% higher than the analyst estimate, while earnings per share were $0.07, 9.2% higher than the consensus — might seem like a contrarian call, especially since at least four analysts either upgraded or raised their target on Cognex stock, but I’m doing it anyways.
Here’s why.
First, let’s go with free cash flow yield. Based on a trailing 12-month free cash flow of $100.3 million [2023 FCF less Q1 2023 FCF plus Q1 2024 FCF] and an enterprise value of $7.75 billion, its FCF yield is 1.3%. I consider anything below 4% to be overvalued territory.
Secondly, its net and operating margins are about half their five-year averages. In Q1 2024, its adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) was 11.9%, 160 basis points worse than Q1 2023, and 70 basis points less than Q4 2023.
Lastly, it has no organic growth. Excluding acquisitions, revenues were down 3% in the first quarter, to $211 million. That’s a five-year compound annual growth rate of 4.1% based on Q1 2019 revenue of $173 million.
Up 15% year-to-date, it’s gotten way ahead of itself.
Upstart Holdings (UPST)
Upstart Holdings (NASDAQ:UPST) has an AI lending platform that uses machine learning models to evaluate the creditworthiness of loan applicants.
“Our AI marketplace connects consumers with our lending partners. Consumers can access Upstart-powered loans via Upstart.com, through a lender-branded product on our lending partners’ own websites, and through auto dealerships that use our Upstart Auto Retail software,” states page seven of its 2023 10-K. “Loans issued through our marketplace are retained by our lending partners, purchased by our network of institutional investors, or funded by Upstart’s balance sheet.”
I’ll admit I was an early admirer of Upstart’s business. In November 2021, I got carried away by the excitement around its AI-driven lending platform, suggesting it could go to $500 or $1,000 before too long.
Given it’s trading around $23, down 40% in 2024, it won’t hit $50 anytime soon, let alone 10x that amount. I was way, way off in my estimation of its potential.
The reality is Upstart’s platform may be a solution looking for a problem. With no analysts recommending its stock and 10 of 16 rating it a Sell, with a $21.25 target price, there is no room for error.
On the date of publication, Will Ashworth 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.
