The surge in AI stocks has captivated many observers with its remarkable performance. Consequently, investors who missed out on this upward trend may be eager to join in, driven by the fear of missing out as they flock to high-flying companies that continue to soar to new heights. However, this exuberance has also raised concerns about the vulnerability of these stocks to a potential selloff.
Citigroup strategist Chris Montagu has raised a cautionary flag regarding the escalating optimism surrounding tech stocks in the United States, warning that investors who anticipate further gains now face the risk of significant losses if this trend reverses.
Despite the S&P 500 reaching record highs fueled by positive tech earnings, there is a growing chorus of voices urging caution, especially as the expected interest rate cuts may be delayed. Personally, I believe that the current rally driven by AI may have pushed certain stocks to unsustainable levels. Here are three companies that I am particularly wary of at the moment.
C3.ai (AI)
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C3.ai (NYSE: AI), once a leader in the AI sector, experienced a significant decline of over 50% from its peak of nearly \(50 per share in 2023. The recent 16% drop in AI stock was attributed to disappointing financial results and accumulated losses. The company reported an operating loss of \)46 million, double the amount anticipated by Wall Street, and also abandoned its profitability target.
Despite these setbacks, C3.ai, a well-funded tech behemoth, possesses a patented AI platform that streamlines model integration, facilitating consistent customer acquisition and revenue growth. While there was a minor setback, Q3 revenue nearly doubled over the past four years. The transition to consumption-based pricing has further accelerated potential growth.
Analysts project a revenue milestone of $443 million in two years, with a price-to-sales ratio of 9.7-times. While there is room for potential upward movement in the stock, I, like with other selections on this list, advocate for a cautious approach. Given the excessive enthusiasm in the AI sector, I anticipate a higher likelihood of downside risks. Therefore, I intend to steer clear of this stock until valuations in this space align more sensibly.
Palantir Technologies (PLTR)
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Palantir Technologies (NASDAQ: PLTR) recently marked its fifth consecutive profitable quarter and a successful year, with PLTR stock surging by almost 20% following an impressive earnings beat.
In the fourth quarter, Palantir witnessed a 25% surge in revenue, with a remarkable 70% increase in U.S. enterprise segment revenue, totaling \(131 million. The company achieved over \)1 billion in commercial revenue for the year, accompanied by a 32% rise in segment revenue to $284 million.
The demand for Palantir’s AI Platform remains robust, surpassing its target of 500 boot camps set in October. With 560 completed sessions across 45 companies this year, the company’s U.S. customer base expanded by 55% to 221. Palantir anticipates continued growth, especially post the integration of AIP with its Foundry platform. However, growth in the public sector decelerated, dropping to 11% from the previous year’s 23%.
While these results are undoubtedly encouraging and suggest that AI adoption is translating into tangible financial outcomes for the company, I urge caution in extrapolating these results over the next few years. The current environment is rife with uncertainties, and similar to other firms on this list, I believe Palantir’s valuation has outpaced its fundamentals.
Nvidia (NVDA)
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I want to emphasize my bullish stance on Nvidia (NASDAQ: NVDA) in the long run. As a dominant player in the semiconductor industry, Nvidia leads the AI space by delivering high-performance chips that underpin the sector’s expansive growth.
However, with a stock price surpassing \(625 per share and new price targets reaching \)1,100, investors must question whether this rally has been excessive. The heightened excitement surrounding this stock has propelled its valuation to extraordinary levels (Nvidia briefly exceeded Amazon (NASDAQ: AMZN) in market value this week), underscoring the remarkable surge in its recent performance.
Challenges persist within Nvidia’s business model. Despite a resilient supply chain, the company may encounter difficulties in meeting the escalating demand for AI chips, potentially triggering price spikes. The anticipated rollout of the H200 chips in 2024 is poised to further enhance its competitive business mix. However, the success hinges on flawless execution, and the fact that NVDA stock is valued optimally leaves minimal room for any future downturns.
In essence, I view Nvidia as a stock for long-term ownership rather than short-term trading. At current levels, I recommend considering reducing exposure until the market exuberance subsides. While NVDA stock may continue its upward trajectory, I believe the prevailing risks are tilted towards the downside for the time being.
On the publication date, Chris MacDonald did not hold any positions (either directly or indirectly) in the securities mentioned in this article. The opinions expressed are solely those of the author, in accordance with the InvestorPlace.com Publishing Guidelines.
Chris MacDonald’s passion for investing has driven him to pursue an MBA in Finance and undertake various managerial roles in corporate finance and venture capital over the past 15 years. His background as a financial analyst, coupled with his enthusiasm for uncovering undervalued growth prospects, shapes his conservative, long-term investment approach.
