4 Artificial Intelligence Bubble Stocks To Bet Against: Profit When The FOMO Runs Out

Nvidia’s blockbuster first-quarter results have helped drive excitement to new levels about investing in artificial intelligence, but market watchers say some stocks are overvalued amid the hype.

The investor enthusiasm is inspiring comparisons to the dot.com bubble that preceded the bust of March 2000, when most tech stocks lost 75 percent of value from their highs.

Economist David Rosenberg, renowned for his ability to spot the next crisis before it hits, said he believes enthusiasm for AI has become a major distraction from the risks of recession, and investors piling into stocks with AI exposure may pay the price.

“No question that we have a price bubble,” said Rosenberg, the president of Rosenberg Research and former Merrill Lynch chief North American economist from 2002 to 2009, on CNBC’s “Fast Money.”

The Nasdaq 100 breakout over the past six months has marked similarities to the late 1990s dot-com boom, he said. “It’s way overextended.”

Stock prices for Nvidia, the world’s most valuable listed semiconductor company and a major supplier of chips for artificial intelligence, gained more than 24 percent after CEO Jensen Huang cited booming demand for its AI chips during its Q1 report. Stocks are up more than 133 percent in the last six months.

Wall Street’s interest in AI has ballooned with the popularity of ChatGPT, the bot that can produce sophisticated-sounding responses to questions about almost everything.

Discover How Affordable Peace of Mind Can Be:
Get Your Life Insurance Quote Today!

Stock prices for tech giants Apple, Microsoft, Alphabet, and Amazon have also skyrocketed as they rush to comPete in the AI arms race and roll out their version of ChatGPT. Collectively, the five companies have grown their market cap to $9 trillion — about 25 percent of the total value of the S&P 500, Business Insider reported. 

Art Cashin, director of floor operations for UBS Financial Services at the New York Stock Exchange, predicted that AI is going to be a new mini-version of the dot-com bubble of the early 2000s. “Everything you hear, it’s going to have an AI iNFLection, everything from new drugs and medicine to predictive natures of all types,” Cashin said in an interview with CNBC.

Ian Bezek, a writer who worked as a junior analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund, identified three AI stocks to sell that he said are overhyped and could see significant declines in the coming months. 

C3.ai (AI)

C3.ai provides software for building enterprise-scale AI applications and accelerating digital transformation. Its systems analyze big data, sifting through tons of information to make predictions about future operations. This allows for predictive maintenance. For example, given years of data about a factory, refinery, aircraft or other such item, C3.ai can forecast when parts will break, allowing technicians to fix things in advance, saving money, reducing downtime and improving efficiency.

C3.ai Inc. shares gained 23 percent after an investigation into accusations by short-sellers found no wrongdoing.

“This is no doubt a highly valuable service, but it’s not glamorous,” Bezek wrote. “It’s not about cool consumer applications such as text or image generation.” 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 similar to C3.ai on that it has AI in its name and offers predictive tools to industrial firms and the Defense Department, Bezek wrote.

However, BigBear.ai is arguably riskier than C3.ai because it was taken public via a special purpose acquisition company (SPAC). Initially, there was no demand for its stock and share prices plummeted from around $10 in May 2022 to a low of 58 cents by year’s end. With the AI excitement in 2023, however, the stock surged as much as tenfold.

The problem is profitability, Bezek wrote. BigBear.ai is losing lots of money on an operating basis and revenue is growing slowly, with analysts projecting a 4 percent increase this year and 10 percent in 2024.

“Predictive analytics just isn’t a fast-moving category that can support the sort of high valuations traders are assigning to AI stocks today,” Bezek wrote. “Throw in a shaky balance sheet and BigBear.ai is not a worthy AI industry selection.”

Nvidia (NVDA)

Bezek predicts AI will be a large and fast-growing market for Nvidia for years, but that’s already baked into the price. He says it’s one of a group of companies that are true leaders in AI, yes its valuation no longer makes sense even in the context of its artificial intelligence ambitions.

“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.”

Nvidia has signaled it may sell up to $10 billion of stocks and other securities to eager investors, Business Insider reported.

“There simply is not enough market cap available to support the buying mania for artificial intelligence,” said Joseph Zappia, a co-chief investment officer at LVW Advisors, in a Wall Street Journal report.

Famous short seller Jim Chanos, known for his bets against Enron and Chinese real estate, took aim at the excessive hype around artificial intelligence, tweeting, “Wall Street is quite good at creating supply to meet demand.”

Upstart

San Mateo, California-based Upstart, which uses artificial intelligence to verify and process loans quickly, lost 82 percent of its market value in 12 months as demand dropped for new loans and interest rates pushed higher amid slower economic activity, Reuters reported.

But the company’s stock jumped 35 percent on May 7 upon announcing it had secured an additional $2 billion in funding.

About 37.5 percent of the company’s free float was in short position. With the 32.8% gain in Upstart’s shares on Wednesday, short sellers stand to lose about $122 million, according to analytics firm Ortex, Reuters reported.

Analysts cheered the new funding but added that the lack of details on deal terms prompted caution.

“While establishing these long-term funding partners is encouraging, it is unclear how much ‘preferential economics’ (Upstart) is giving up to these long-term committed partners,” Wedbush analyst David Chiaverini said.