It’s no secret that a few names have reached excessive valuations during the recent growth stocks rally. And so, they are overdue for a correction. Even if you think that AI will generate hundreds of billions in revenue within this decade, these stocks of AI-related businesses are trading far too ahead of the curve. Therefore, you can likely grab them for cheaper at a later date.
This rally now reminds me of the tech bubble of the 2000s. Certain stocks reached sky-high valuations, driven by speculation and ambitious growth targets despite delivering weak financial results. Don’t get me wrong. I have a lot of optimism for AI, but it is far from the level it needs to be to generate hundreds of billions in revenue.
It excels at many niche white-collar specialties, but treating some text-based large language models like Skynet from The Terminator is simply wrong. It isn’t a new phenomenon either. “AI” has already been around for years, just without the buzz after ChatGPT’s release.
Considering that, we’ll look at the stocks to avoid this bubble. Finally, I wouldn’t include Nvidia (NASDAQ:NVDA) in this list, as I’ve already done so in many of my recent articles. I recommend reading this article to understand why I consider NVDA a sell also.
Many hail C3.ai (NYSE:AI) as a leading company in the artificial intelligence sector. A so, they invest in the company without even knowing what it does, all thanks to the AI ticker.
Unfortunately, the truth is that most of these investors who fall victim to this stock can’t even name a single product the company offers. Other AI companies actually have working products that are both popular and unique. In contrast, C3.ai brings nothing new to the table regarding AI. It simply has marketing.
I will ignore this company’s horrible financials and move on to what actually brings in the dollars to its top line.
“C3.ai…has a pattern of exaggerated business claims and is using multiple strategic partnerships with well-known companies such as Baker Hughes, Hewlett Packard Enterprises, Microsoft, Google, and Intel to project an aura as a successful enterprise artificial intelligence platform with limitless growth,” Investment researcher Spruce Point explains. “In reality, we believe C3 has failed to gain broad market acceptance, is on its third rebrand, and its revenues are being propped up by an aggressively managed and struggling strategic partnership with Baker Hughes amounting to >30% of sales.”
Plus, if you go to the company’s website, you will find lots of marketing videos about partnerships with many companies. But how big are these partnerships? The truth is — not much at all.
Another odd thing I’d like to mention is that C3.ai counts customer engagements as “customers.” If a partner uses two of its products, this company will count them as two customers, but that’s just the tip of the iceberg.
Sell the stock before it pops.
Palantir (NYSE:PLTR) is another company on board the AI hype train. It has surged over 125% since its trough in May and now trades at an exorbitant forward price-to-earnings ratio of 78 times.
Even if you take all the AI speculation as true, paying $16.5 per share of Palantir is excessive. And yet, the company looks priced for perfection. I would not pay a dime above $10, even if it manages to sustain 20% year-over-year sales growth for the next five years.
The average analyst feels the same here, and the consensus price target is $11.4, implying a 31% downside risk. Moreover, Palantir’s insiders have been dumping the stock. There were 17 insider selling transactions and no insider buying over the past three months. In fact, 3,271,619 shares were sold. Count PLTR as one of the top stocks to avoid.
Eli Lilly (LLY)
While most stocks to avoid would be in the AI sector, Eli Lilly (NYSE:LLY) is an exception. Another exception is that I like the business, but that doesn’t mean I have to like the stock too.
LLY stock is quite expensive at 52 times forward earnings, and that premium is unjustified. Companies in the pharmaceutical or biotech industries are hazardous. And paying this premium for LLY completely disregards what potentially could go sideways.
I admit that there are a lot of catalysts ahead in favor of Eli Lilly. Namely, these catalysts include weight loss drugs and its Alzheimer’s pipeline. However, these catalysts are all priced in this range.
On the other hand, not all these clinical trials show a rosy picture.
Lane Simonian, an analyst with over a decade of Alzheimer’s disease research, pointed out that “…Eli Lilly’s Alzheimer’s drugs have shown little efficacy, particularly in non-APOE4 carriers.” That’s not all.
“The companies recast the data to suggest non-carriers benefitted more from their drugs, but in reality, non-carriers benefitted least as they often have little to no amyloid in their brains,” Simonian said.
Any risk or doubt about the company’s product efficacy is problematic at this price range. This places LLY among the stocks to avoid.
On the date of publication, Omor Ibne Ehsan 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.