I believe the next few quarters will bring a harsh dose of reality for many AI stocks. Many of these stocks have decoupled from their underlying business fundamentals. Hype and speculation, rather than revenues and profits, are driving their valuations.
We’ve already seen the bubble start to burst for some AI startups. Their stock prices have cratered from stratospheric levels, sending their valuations back to earth. I expect this trend to continue and spread to other overhyped names.
As the initial frenzy fades, investors will refocus on the numbers. And for many AI companies, the numbers simply don’t add up. Nosebleed valuations can’t be sustained without equally lofty financial results.
Thus, If you own these names, I recommend selling them while you still can. Let’s dive in and see why their best days are already behind them.
SoundHound AI (SOUN)
SoundHound AI (NASDAQ:SOUN) stock has been on a tear in 2024, surging 164% year-to-date and jumping 41% in July alone. However, I believe a major correction is looming. The voice AI company is riding high on the artificial intelligence hype, reaching a lofty $1.8 billion market cap despite facing stiff competition from tech giants who already have established speech recognition technologies.
SoundHound’s offerings don’t seem differentiated enough to justify its excessive valuation of 26-times forward sales, especially with no profits on the horizon. The company’s first quarter saw revenue grow 73% to $11.6 million, but net losses still increased 20% to over $33 million. Analysts are starting to grow skeptical, with DA Davidson recently downgrading the stock on valuation concerns.
As the AI frenzy inevitably cools off, SoundHound’s share price appears to be poised for a dramatic fall. The company will need to prove it can carve out a profitable niche against larger rivals to earn its current premium. For now, I’m steering clear of this overhyped AI stock before the music stops.
BigBear.ai (BBAI)
BigBear.ai (NYSE:BBAI) has been a major disappointment in the AI sector this year. I believe the stock is one of the most volatile names in this space. And importantly, the company hasn’t kept up with its AI peers due to serious fundamental flaws. BBAI shares have popped a few times on AI hype, but the stock is still down around 25% year-to-date.
In my view, BigBear.ai will likely go bankrupt eventually. Profits are not in sight for the foreseeable future, and the company is burning through cash at an alarming rate. BigBeaer.ai reported a staggering net loss of $125 million in just the last quarter alone. Additionally, the company only has $81.4 million in cash left on its balance sheet as of Q1 2024. Even if it survives, its financials don’t warrant a premium valuation.
Click to Enlarge
I see little reason for optimism here. BigBear.ai faces major headwinds, and its AI-powered analytics platform has failed to gain much traction. Investors should steer clear of this struggling AI laggard.
Teradyne (TER)
Teradyne (NASDAQ:TER) stock has been on a tear lately, soaring nearly 60% since bottoming out in April. The automation equipment maker seems to be riding the wave of companies racing to automate their logistics. But I have my doubts.
First off, Teradyne’s financials aren’t exactly booming like its stock price. Revenue actually declined by around 3% year-over-year in Q1 2024. Even bullish analysts expect growth to quickly revert to sluggish levels over the next two years.
Secondly, insiders are cashing out. Director Johnson Mercedes recently dumped nearly $90,000 worth of shares. That’s not exactly a vote of confidence. Moreover, the stock’s valuation looks seriously stretched to me. Teradyne trades at a lofty 50-times forward earnings and 9-times sales. That’s awfully rich for a slow-growing industrial automation company, AI hype or not.
Teradyne is expected to post high growth for around two years, but growth is also expected to fall off a cliff right after that. Thus, I think this stock has likely peaked for now. Investors chasing this momentum name at these nosebleed levels could end up sorely disappointed.
On 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 writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.
