Since the U.S. Federal Reserve signaled in mid-June that two more interest rate hikes are likely this year, technology stocks have been trending lower, led by companies focused on AI.
Big investors that include hedge funds and other institutions such as college endowments are separating the wheat from the chaff among AI-focused companies. While some concerns are sure to emerge as winners in AI over the long-term, many of the AI stocks that are now slipping lower are unlikely to survive.
As the market for AI matures and leaders in the field emerge, it will be important for investors to be discerning and separate good AI investments from bad ones. Failure to do so could hurt a portfolio and lead to long-term losses. Here are three AI stocks that have big investors running for the exit.
Chinese technology giant Baidu (NASDAQ:BIDU) recently announced that its generative artificial intelligence chatbot, called Ernie Bot, outperformed OpenAI’s leading chatbots, ChatGPT and GPT-4, on several tasks.
Baidu’s claims have yet to be independently verified, but they seem to be the latest attempt by the company to bolster its AI credentials following a disastrous launch this past spring of Ernie Bot. Showing a pre-recorded video of Ernie Bot rather than a live demonstration left investors and developers underwhelmed.
The poor launch of its generative A.I. platform has led many people to conclude that Baidu, and China’s entire tech sector, badly lags the U.S. when it comes to chatbots and the technology that drives their performance.
This helps to explain why investors, including many hedge funds, have been selling BIDU stock. The company’s share price remains down nearly 10% over the last 12 months and is currently trading 42% lower than where it was five years ago. The subpar performance makes Baidu an AI stock to avoid.
On the surface, the stock of U.S. artificial intelligence firm C3.ai (NYSE:AI) appears to be flying. Year to date, the company’s share price has nearly tripled (up 195%). But look a little closer and there are problems lurking under the surface.
The big issue is that C3.ai has attracted an incredible short position among traders who are betting that AI stock will decrease moving forward. Currently, 30% of the company’s outstanding shares are shorted, meaning that traders are betting on the stock to collapse following its big run over the last six months.
The heavy short position has also ratcheted up expectations that C3.ai is a candidate for a short squeeze by retail investors. Indeed, chatter on social media focuses on an impending short squeeze in AI stock.
Should a short squeeze occur, it will surely send shares of C3.ai even higher than they have already climbed this year. But it likely won’t be long before the share price craters as investors take profits and dump the stock. This is a potentially dangerous situation that investors should avoid. AI stock is a risk.
Upstart Holdings (UPST)
Like a lot of AI stocks, shares of Upstart Holdings (NASDAQ:UPST) have exploded this year. The company, which uses AI to predict the creditworthiness of consumers before issuing loans, has seen its stock vault 153% higher year to date.
However, looking out further, the company’s share price leaves much to be desired. Despite this year’s bull run, UPST stock is trading 16% lower than where it was 12 months ago. Over five years, the share price is down 26%.
Investors should also keep in mind that UPST stock has fallen 15% since mid-June as enthusiasm for AI-related companies wanes.
There is some speculation that the meteoric rise of Upstart’s stock this year has been fueled by a short squeeze.
Regardless, many professional investors remain skeptical of Upstart’s business model, which sidesteps traditional methods of evaluating borrowers’ creditworthiness, such as their FICO score, and instead focuses on metrics such as a person’s grade point average and standardized test scores. Time to sell.
On the date of publication, Joel Baglole 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.