Volatility Increases for Hyped AI Stocks

Several stocks that surged following the initial hype over artificial intelligence (AI) hype have come back to earth.  Other stocks caught up in the AI craze may also see an increase in volatility as the market shakes out winners and losers in the sector.  The volatility highlights the risks for stocks inflated by AI excitement, drawing the attention of retail traders and short sellers. 

At the beginning of August, Upstart Holdings (UPST) was one of the best performers in the Nasdaq 100 Stock Index ($IUXX) (QQQ), surging +445% amid the euphoria about AI. However, the stock price has fallen by half since then, underscoring the dangers for stocks swept up by AI fervor. Jeffries said, “AI is certainly a very popular innovation right now, but that doesn’t mean that everything AI doesn’t come with certain risks tied to it.”

Upstart uses artificial intelligence to evaluate individuals applying for personal loans.  Its shares plunged -53% last month, with most of the losses coming the week after the company offered a disappointing outlook due to pressure from higher interest rates.  Jeffries said, “This is a company that markets themselves as an AI lender, so it became a frenzy of ETFs and different types of funds and retail investors that were buying anything AI, without doing much diligence, frankly.” Also, according to S3 Partners, short interest in the stocks remains high, with more than 30% of the float.

Other stocks linked to AI are also struggling to live up to lofty expectations.  Software maker C3.ai Inc (AI), whose stock price nearly quadrupled in June, has since lost about a third of its value.  The stock is down -22% since its last earnings report in late May after providing a fiscal-year revenue outlook that fell short of expectations, fueling concerns the company is not living up to ramped-up expectations.  The company projected an adjusted loss of $50-75 million this fiscal year.  A group of unprofitable tech firms tracked by Goldman Sachs has pared its gains this year to 36% after reaching as much as 56% in July.

With all the hype surrounding any stock associated with AI, some analysts are cautious about the sector. UBS Global Wealth Management said the surge in valuations has pushed multiples to a point where investors should be more selective, saying, “The surge in AI applications has created a powerful new narrative for the broader tech sector, but rich valuations may limit near-term upside.  We suggest investors maintain exposure but balance near-term optimism against other portfolio considerations.” 

On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.