Beware! 3 AI Stocks Waving Massive Red Flags Right Now

Stocks to sell

It’s been hard to go wrong with artificial intelligence stocks this year. A surprise 2023 stock market rally and Nvidia’s (NASDAQ:NVDA) jaw-dropping earnings results created a boom for many stocks.

And just like that, artificial intelligence (AI) suddenly became a buzzword. Investors scooped up shares of small, medium, and large-cap companies that stood poised to benefit from the growing demand for artificial intelligence tools.

However, with any popular trend, some investors get a little ahead of themselves and momentum can make stocks look enticing in the short term. Incredible gains can blind investors from glaring fundamental issues that threaten to turn today’s winners into tomorrow’s laggards.

With that in mind, you may want to steer clear of these three AI stocks.

C3.ai (AI)

Source: shutterstock.com/Below the Sky

C3.ai (NYSE:AI) is an AI application software company. The firm services companies that need enterprise AI tools.

In Q1 FY 2024, C3.ai reported $72.4 million in revenue. And while that figure represents 10.9% year-over-year revenue growth, it’s a significant deceleration from last year’s 25% year-over-year revenue growth.

C3.ai has some large clients and partnerships with notable corporations. However, that business activity does not justify a $3 billion market cap. Furthermore, C3.ai is still generating steady net losses which don’t seem likely to get resolved any time soon.

C3.ai shares have gained 150% year-to-date due to the AI boom and overall strong buying activity across the stock market in 2023. However, shares have declined by 18% over the past month and are down by 76% over the past five years. Those numbers offer a more accurate understanding of this stock’s future.

Investors who heard about the company in 2023 may be blindsided by high year-to-date returns. However, the company has reported decelerating revenue while other AI companies have reported high double-digit revenue gains.

Upstart Holdings (UPST) 

Source: T. Schneider / Shutterstock.com

Upstart Holdings (NASDAQ:UPST) is a fintech company that uses artificial intelligence to pair borrowers with loans. The company makes loans more accessible to consumers who do not have the best credit scores.

Upstart speeds up the lending process, but it’s best not to rush certain things. While the stock has performed well year-to-date, a wider lens shows the stock’s shortcomings. UPST stock is down by more than 30% over the past five years. Furthermore, Upstart’s Q3 guidance for $140 million in revenue represents another year-over-year drop, assuming the company reaches that benchmark.

And recently investors don’t need a wide lens to see the stock is in trouble. Upstart reported a substantial 40% year-over-year revenue decrease in the second quarter and shares have crashed by over 50% since Aug. 1.

Upstart has heavy losses and hasn’t done much to improve the situation. Higher interest rates and rising inflation are the catalysts of stagflation and could decimate Upstart’s business model. This is an AI stock to avoid.

Veritone (VERI)

Source: Andrey Suslov / Shutterstock

Veritone (NASDAQ:VERI) offers enterprise artificial intelligence software and solutions. The company’s aiWARE platform supports machine learning models that can transform data sources into actionable intelligence.

Veritone had a strong start to the year with shares rising by over 90% in January. However, the company’s less-than-desirable financials eventually overwhelmed the stock. Shares have plunged by over 50% year-to-date, even when other AI stocks are soaring.

The collapse has brought the company’s market cap down to $94 million. And yes, some investors see opportunities in penny stocks. But these opportunities come from significant changes to the fundamentals or a short-term trading frenzy. Veritone doesn’t have a saving grace at this time. Revenue and earnings are both down year-over-year in the latest earnings report.

This is a high-risk investment that is very unlikely to pay off. Investors can pick better assets, particularly among AI stocks, to generate an upside.

On the date of publication, Marc Guberti 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.

On Penny Stocks and Low-Volume Stocks: With only the rarest exceptions, InvestorPlace does not publish commentary about companies that have a market cap of less than $100 million or trade less than 100,000 shares each day. That’s because these “penny stocks” are frequently the playground for scam artists and market manipulators. If we ever do publish commentary on a low-volume stock that may be affected by our commentary, we demand that InvestorPlace.com’s writers disclose this fact and warn readers of the risks.

Read More: Penny Stocks — How to Profit Without Getting Scammed

Marc Guberti is a finance freelance writer at InvestorPlace.com who hosts the Breakthrough Success Podcast. He has contributed to several publications, including the U.S. News & World Report, Benzinga, and Joy Wallet.

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