The recent surge in AI stocks has created a bubble that is now starting to burst, as investors refocus on the underlying business fundamentals. Hype and speculation have driven the valuations of many AI companies, but the numbers simply don’t add up. Several overhyped names have already seen their stock prices plummet, and this trend is expected to continue.
One such company is SoundHound AI (SOUN), which has experienced a remarkable 164% surge in its stock price year-to-date. However, its excessive valuation of 26-times forward sales is difficult to justify, especially considering the lack of profits on the horizon. Despite revenue growth of 73% in the first quarter, SoundHound AI still reported net losses of over $33 million. Analysts are growing skeptical, with DA Davidson downgrading the stock due to valuation concerns. As the AI frenzy cools off, SoundHound AI’s share price is poised for a significant fall.
BigBear.ai (BBAI) has also been a major disappointment in the AI sector this year. The company’s stock is down approximately 25% year-to-date, and its financials indicate serious fundamental flaws. With no profits in sight and a net loss of $125 million in the last quarter alone, BigBear.ai is burning through cash at an alarming rate. Even if it manages to survive, its financials do not warrant a premium valuation. Investors should avoid this struggling AI laggard.
Teradyne (TER), an automation equipment maker, has seen a recent surge in its stock price. However, doubts remain about its financial performance, as revenue declined by around 3% year-over-year in the first quarter of 2024. Insiders are also cashing out, with Director Johnson Mercedes recently selling nearly $90,000 worth of shares. The stock’s valuation appears stretched, trading at a lofty 50-times forward earnings and 9-times sales. With growth expected to slow down significantly in the coming years, Teradyne’s stock may have peaked for now.