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Since the launch of ChatGPT in November of last year, stocks involved and related to Artificial Intelligence (AI) have been on a tear. McKinsey & Company’s report titled "The Economic Potential of Generative AI" estimates that generative AI could add $2.6 trillion to $4.4 trillion to the global economy.
The rally in AI stocks has been led by Nvdia (NVDA) , which is up 192% year-to-date (YTD). Microsoft (MSFT) has also surged, up 42% in 2023.
Investors seem to be caught up in a “fear of missing out” (FOMO) AI frenzy. As a result, we're seeing stocks whose prices have been pushed to sky-high levels and are now currently overvalued.
What is an overvalued stock?
An overvalued stock is one whose stock price does not justify its earnings potential and growth prospects. In simple words, you pay way more than what the stock can give. A stock can become overvalued because investors overreact to a product, speculation, or market hype. Overvaluation can happen when there is too much liquidity in the market, due to low interest rates, as was the case during the pandemic.
How to identify overvalued stocks?
A stock’s valuation is relative to various factors like market sentiment, trading activity, fundamentals, and future growth prospects. One way to look at a stock is to start by understanding the overall market and industry sentiment and then at the stock’s technical indicator, like Relative Strength Index (RSI), to see if it is overbought.
Then map the stock price against Wall Street Analysts' mean target, which is an average of analysts price targets. Their price targets are created by Wall Street analysts after evaluating a company’s valuations, earnings outlook, and long-term growth prospects.
3 Overvalued AI stocks
C3.ai
Founded in 2009, C3.ai (AI) is an enterprise AI software that provides products for customer relationship management, inventory optimization, demand forecasting, and other enterprise functions. It caters to industries like oil and gas, defense and aerospace, high tech, energy and manufacturing. It adopted several AI applications like unsupervised learning, supervised learning, natural language processing, deep learning, and reinforcement learning.
These offerings helped C3.ai grow to a $252.7 million annual revenue company. However, it is still making losses because of its high marketing and research expenses. These research expenses helped C3.ai create its Generative AI Product Suite in the fourth quarter. This suite allows enterprise users to do predictive analytics by accessing enterprise and external datasets while respecting access controls.
While generative AI does open new growth avenues, creates shorter sales cycles and grows consumer interest, C3.ai’s fiscal 2024 revenue outlook of $295-$320 million shows only 17% growth potential.
C3.ai has rallied 76% in the past month and now has a market cap of about $5 billion. Its 14-day RSI of 67% suggests the stock is pretty close to overbought. The RSI measures stock price momentum, with an RSI above 70 being overbought and below 30 being oversold.
The majority of analysts that cover C3.ai are not bullish: 2 rate the stock Strong Buy, 6 rate it a Hold, 2 rate it a Moderate Sell, and 2 rate it a Strong Sell. The mean target for the stock is $25.70, which is 42% lower than where the stock is currently trading:
Palantir Technologies
Founded in 2003, Palantir (PLTR) started trading on NYSE in October 2020. The company offers an AI-enabled enterprise data platform that synthesizes unstructured data and provides actionable insights to end users. Its offerings include Foundry for commercial business, Gotham – for real-time information processing for governments, and Apollo to run Foundry across various on-premise and cloud networks. Palantir grew to a $1.9 billion annual revenue company.
It has been criticized by Wall Street analysts for its dependence on the government for revenue, even though it is gradually broadening its commercial clientele, with its US commercial consumer count growing 50% year-over-year in the first quarter.
In the latest quarter, even Palantir launched its AI platform to help organizations to activate large language models safely and securely. Despite the AI adoption, the company expects no more than 17.3% growth in its FY2023 revenue outlook of $2.185 billion-$2.235 billion.
In the past month, PLTR has rallied 39% and has a market cap of $34.5 billion. Its 14-day RSI of 75% suggests the stock is overbought.
The majority of analysts that cover Palantir are not bullish: 2 rate the stock Strong Buy, 6 rate it a Hold, and 4 rate it a Strong Sell. The mean target for the stock is $9.45, which is 42% lower than where the stock is currently trading:
Upstart Holdings
Founded in 2012, Upstart (UPST) operates an AI lending platform that aggregates loan demand and connects it to its bank and credit union network. The stock is more sensitive to interest rate hikes than the other two as it earns revenue based on the volumes of loans processed. A higher interest rate discourages new loans and slows growth for Upstart.
Its first-quarter revenue fell 67% to $102.9 million, which resulted in a net loss of $129.3 million. While it uses AI technology to approve loans, the application is niche and might pull demand further in times of uncertainty. The banking sector is the hardest in a crisis. The short-term is uncertain for the stock. But the Fed paused the rate hike and gave a breather.
In the past month, UPST has rallied 61% and has a market cap of about $3 billion. Its 14-day RSI of 72% suggests the stock is overbought.
The majority of analysts that cover Upstart are not bullish: 1 rates the stock Strong Buy, 4 rate it a Hold, 2 rate it a Moderate Sell, and 8 rate it a Strong Sell. The mean target for the stock is $14.88, which is 60% lower than where the stock is currently trading:
