Introduction
Artificial intelligence (AI) has been the hottest theme on Wall Street. Over the past year, investors poured money into companies promising to revolutionize industries with machine learning, natural language processing and automation. As a result, some AI stocks have shot up by hundreds of percent. But not everyone believes the rally is sustainable. A handful of Wall Street analysts now warn that three of these high-fliers could lose between 71% and 80% of their market value. In this article, we break down which names are on the chopping block, why analysts are turning cautious, and what it could mean for your portfolio.
Stock 1: C3.ai (AI)
Why it soared
• C3.ai offers enterprise AI solutions that help large companies build custom machine-learning applications.
• Since its December 2020 IPO at $42, the stock rocketed as investors bet big on the promise of “AI for every business.”
• At its peak in late 2023, C3.ai traded above $180, driven by partnerships with Microsoft and the Pentagon.
Analyst warning
• RBC Capital Markets recently cut C3.ai from Outperform to Sector Perform.
• The new price target: $10 per share (versus around $45 today), implying a 78% downside.
• Analyst Damien Conover argues that C3.ai’s revenue growth will slow as competition heats up and big clients negotiate harder deals.
Key risks
• Valuation: C3.ai still trades at over 30 times forward sales, one of the highest multiples in enterprise software.
• Cash burn: The company has yet to turn an operating profit and is investing heavily in R&D.
• Competition: Tech giants like Microsoft, AWS and Google Cloud offer AI toolkits that can undercut C3.ai on price.
Possible catalysts
• Major new contracts or a surprise profit beat could stabilize the stock.
• A broader AI market pullback may weigh on C3.ai along with peers.
Stock 2: SoundHound AI (SOUN)
Why it soared
• SoundHound AI develops voice-based AI assistants for cars, call centers and smart devices.
• Hype around voice tech and the “metaverse” helped lift the stock from below $5 in mid-2023 to over $15 by early 2024.
• Partnerships with Hyundai and Uber fueled optimism about widescale adoption.
Analyst warning
• Jefferies recently downgraded SoundHound AI to Underperform.
• Price target slashed from $15 to $3, suggesting an 80% drop from current levels.
• Jefferies notes that actual sales growth has lagged the hype, and the path to meaningful profitability is murky.
Key risks
• Revenue timing: Big automotive contracts often come with long lead times and uncertain rollout schedules.
• Cash reserves: High R&D spending means SoundHound may need to issue more shares or take on debt.
• Market competition: Rivals like Nuance (owned by Microsoft), Google Assistant and Amazon Alexa dominate voice AI.
Possible catalysts
• Accelerated revenue from new partners could ease profit concerns.
• A technology breakthrough in voice recognition might win back investor confidence.
Stock 3: UiPath (PATH)
Why it soared
• UiPath is a leader in robotic process automation (RPA), using AI to automate repetitive tasks in finance, HR, customer service and more.
• The stock leaped from under $30 in mid-2022 to over $80 in late 2023 as businesses rushed to cut costs.
• UiPath’s slick marketing and fast revenue growth attracted both retail and institutional investors.
Analyst warning
• Citigroup recently cut UiPath to a Sell rating.
• New price target: $20 per share (versus around $100 today), implying an 80% plunge.
• Citi analysts warn that RPA demand is cooling as customers push back on high subscription prices.
Key risks
• High valuation: UiPath trades at roughly 15 times forward sales, above many software peers.
• Renewal rates: Some large clients have balked at higher renewal fees, raising questions about future revenue stability.
• Competition: Microsoft’s Power Automate and other low-cost alternatives threaten UiPath’s market share.
Possible catalysts
• Better-than-expected retention and upsell numbers could arrest the slide.
• Expansion into adjacent AI services might reignite growth expectations.
3 Takeaways
• Valuations are stretched. High sales-to-price multiples make these stocks vulnerable if growth slows.
• Profitability matters. None of the three companies has delivered consistent profits, yet all burn significant cash.
• Competition is fierce. Tech giants and well-funded startups alike are chasing the same AI use cases.
3-Question FAQ
Q1: Should I sell my AI stocks now?
A1: It depends on your risk tolerance and investment goals. If you’re uncomfortable with large swings, you may want to trim high-flyers and lock in gains. Always consider consulting a financial advisor.
Q2: What makes a stock drop 70% or more?
A2: Overly optimistic price targets, missed earnings expectations, rising competition and shifts in investor sentiment can all trigger sharp sell-offs. High valuations amplify the drop.
Q3: Are there safer ways to invest in AI?
A3: Yes. You might look at large, diversified tech leaders with AI divisions (think Microsoft or Google). ETFs that track a broad basket of AI and automation stocks can also smooth out volatility.
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