Artificial Intelligence has effectively transformed multiple sectors, but the meteoric rise of AI stocks has raised many eyebrows in financial circles. It has also led to an increasing focus on AI stocks to sell. The recent concerns stem from a potential “baby bubble” in this sector, as termed by the Bank of America (NYSE:BAC) analysts. Despite the transformative potential of AI, inflated asset prices abound, indicative of widespread overvaluation in many AI stocks.
Enamored by the seemingly limitless growth AI stocks provide, many have dove into this sector for quick gains. However, many investors are now questioning these valuations’ sustainability. Institutions like Edmond de Rothschild Asset Management have voiced concerns over these lofty valuations.
This article focuses not only on overvalued AI stocks, but on AI stocks with weak underlying businesses and murky outlooks ahead.
Lemonade (NYSE:LMND) is an AI-driven insurer that has been a start-stop story since its IPO in July 2020. Its share price has lost more than 60% of its value this then, due to worsening losses and cash bleed. It exited its first quarter with roughly $250.1 million in cash equivalents, a 56% drop from 2020.
The firm uses AI to refine underwriting systems and chatbots for swift claims processing, an intriguing play in the insurance sphere. But, the glitz of the company’s AI technology hasn’t been complemented with financial stability.
Last year was a relatively strong one for its business, with in-force premiums increasing by more than 116%. However, in 2023, insurance premiums are forecasted to climb by only 10% to 12% year-over-year to $700 million to $705 million. More importantly, Lemonade’s profitability metrics remain firmly in the red, with EBITDA and free cash flow margins at 85.7% and 41%, respectively. Analyst estimates point to further losses over the next couple of years, making this an unprofitable tech stock worth avoiding.
Popular news outfit Buzzfeed (NASDAQ:BZFD) has been using AI to churn out content of late. However, I think its cost-cutting efforts are unlikely to steer the company out of its troubling financial predicament.
As Buzzfeed burns through its cash reserves, the threat of bankruptcy looms. Its latest report shows that its cash balances have dwindled by more than 45% to $49.9 million. On top of that, the bulk of its capital is reportedly held at Silicon Valley Bank, which spells more trouble ahead.
Buzzfeed has announced the shutdown of its news segment to mitigate losses due to a lack of reader interest. The company plans to refocus its efforts on HuffPost. However, despite this cost-saving measure, HuffPost remains a loss-making segment. As a result, funneling resources into this area will unlikely spark a turnaround for the firm. Moreover, generating AI-based content is unlikely to attract a strong readership base over time, at least at Buzzfeed’s scale.
Veritone (NASDAQ:VERI) is known for its AI-powered media and advertising solutions. However, like the other stocks on this list, Veritone misses the mark in terms of its financials. Despite the popularity of its aiWare platform, the firm’s promising narrative in the AI domain has yet to translate into financial success.
Over recent years, organic revenue growth has stuttered, with acquisitions accounting for the lion’s share of expansion. Additionally, up to 30% of its sales depend upon retail titan Amazon (NASDAQ:AMZN). This is incredibly concerning, given the belt-tightening measures implemented by the “The Everything Store” amid Veritone’s current cost-cutting spree.
Aiming to pare down its growing $26 million net loss, Veritone’s belt-tightening efforts appear to be hindering revenue growth. Its forward revenue growth estimates stand at a meager 10.3%, starkly contrasting its 5-year average growth of 68%. Hence, the path to profitability remains elusive, and this is another AI-related stock I think is best avoiding here.
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On the date of publication, Muslim Farooque 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