Many institutional and retail investors and traders often embrace fads for relatively short amounts of time. In other words, many entities will buy stocks within a “hot” category for six months to a year. Then they will rapidly sell the same equities as the Street becomes less enamored with the sector.
In just the last two years, SPAC stocks, electric-vehicle stocks, housing stocks, solar stocks, and metaverse stocks have gone through this type of “boom-and-bust” cycle. Therefore, with AI stocks currently in a “boom” phase, it’s crucial to identify large-cap AI stocks to avoid before the sector inevitably reaches the “bust” portion of the cycle.
Of course, unprofitable companies with very high valuations and companies facing tough competition will be particularly vulnerable to the looming downturn of AI stocks.
In light of those points, here are seven large-cap AI stocks to avoid like the plague.
Shunned by the Street for the last two years, Meta (NASDAQ:META) has recently become a Street darling thanks to its embrace of AI, its decision to, despite its name, radically cut its spending on the metaverse and the possibility that one of its key competitors, TikTok, will be banned in the U.S.
But, as I explained in the introduction to this column, the Street, following its usual pattern, will certainly become less thrilled by AI within six months to a year from now.
And while Meta’s spending cuts are pleasing investors for now, that sugar high is unlikely to last as investors realize that Facebook’s owner is still grappling with tough competition for users from Snap (NYSE:SNAP) and TikTok, while it’s continuing to fight powerful competitors, including Alphabet (NASDAQ:GOOG, GOOGL), Amazon (NASDAQ:AMZN), and Roku (NASDAQ:ROKU), for ad dollars. Moreover, as I’ve noted, I don’t expect the metaverse, which has been around for over 20 years and has not captured many adult users during all those years, to ever come close to meeting the elevated expectations of Meta CEO Mark Zuckerberg.
As far as TikTok is concerned, I would be very surprised if Washington, ahead of a very important election in 2024, decides to ban TikTok, which has become extremely popular with many young Americans.
Palantir (NYSE:PLTR) does widely use AI. However, I have long maintained that I do not see evidence that Palantir’s AI tools are superior to its competitors. While researching this column, I saw no evidence that this situation has changed.
Moreover, some data points from the company’s fourth-quarter results indicate that, despite businesses and governments’ increased embrace of AI in recent months, Palantir’s growth is slowing a great deal.
For example, in Q4, the company’s U.S. revenue increased just 1.7% versus the previous quarter to $302 million. And its overall top-line growth slowed to 18% year-over-year in Q4, down from 22% in Q3.
During its Q4 earnings call, Palantir’s executives sounded very excited that, after nearly 20 years of existence, the company generated its first quarterly profit, as it reported a Q4 net income of $31 million or 1 cent per share.
However, its operations still generated an $18 million loss, with its operating margin at a discouraging -4%. Its shallow margin proves that the company’s AI technology is nothing special. That’s because if Palantir’s technology was very advanced, it could charge high prices to increase its operating margins to more impressive levels.
With Alibaba (NYSE:BABA) saying that it’s “testing an artificial intelligence-powered chatbot internally,” some investors might see the Chinese e-commerce giant as an attractive AI play.
But BABA’s fourth-quarter results indicate that its two largest businesses by revenue–China e-commerce and Alibaba Cloud — are performing quite poorly. Specifically, the revenue of its China-e-commerce business fell 1% year-over-year in Q4, while its cloud business generated a loss of 1.5 billion Chinese yuan, or $218 million.
Conversely, the e-commerce revenue of one of Alibaba’s leading competitors in China, JD.com (NASDAQ:JD), increased by 3.5% last quarter. And it’s a very bad sign for BABA that, well over a decade since it launched its cloud business, the unit is still bleeding tons of red ink.
Meanwhile, in 2021 and 2022, BABA was a frequent target of China’s ruling Communist Party after the e-commerce giant’s founder, Jack Ma, harshly criticized the country’s financial system. Although there have been signs that Beijing is becoming less punitive towards the nation’s tech firms, some say that Chinese authorities may not be ready to become completely friendly towards the sector. That’s because the country has obtained “golden shares” in a number of prominent Chinese tech names, including a key BABA subsidiary.
CNN explained that these shares “allow government officials to be directly involved in [tech firms’] businesses, including having a say in the content they provide to hundreds of millions of people.”
Beijing’s decision to take “golden shares” in BABA’s subsidiary suggests that the government may, at a moment’s notice, resume taking punitive actions against BABA, causing the conglomerate’s shares to tumble.
Coinbase (NASDAQ:COIN) says that it’s a prolific user of AI. “AI has been in the DNA of the company from the very beginning,” the crypto exchange’s director of data science, Soups Ranjan, told Amazon.
According to Ranjan, COIN uses AI to prevent fraud. “One of the biggest risk factors that a cryptocurrency exchange must get right is fraud, and machine learning forms the linchpin of our anti-fraud system.” the executive explained.
But, despite crypto’s recent rebound amid the problems suffered by several banks in March, most cryptos are still very far below their highs. And cryptos proved worthless as a hedge against inflation in 2021 and 2022, destroying one of crypto bulls’ main arguments. Given these points, I believe that most investors have lost confidence in cryptos.
Supporting the latter contention, there were $80 billion of assets on COIN’s platform at the end of Q4, down from $278 billion at the end of 2021.
Meanwhile, the federal government is quite obviously targeting crypto in general and COIN in particular. For example, the Securities and Exchange Commission is demanding that crypto exchanges, including Coinbase, register as securities exchanges, but COIN has refused to do so.
Additionally, the agency has taken steps to ban “crypto staking,” which has become a key source of revenue for Coinbase. Further, the Federal Reserve, the FDIC, and the Controller of the Currency have adamantly tried to prevent banks from funding “crypto-asset-related entities.”
Very few people or organizations can fight Washington and emerge victorious.
ARK Autonomous Technology & Robotics ETF (ARKQ)
One of Cathie Wood’s ETFs, the ARK Autonomous Technology & Robotics ETF (NYSEARCA:ARKQ) reports that it “focuses on energy, automation and manufacturing, materials, artificial intelligence, and autonomous transportation.”
Since I began following Wood in 2021, I’ve been very unimpressed with her stock picks. I think she tends to pick a rather high percentage of names with poor prospects, excessive, unwarranted valuations, and/or extremely tough competition. Among her picks of the last two years that had one or more of those characteristics have been Coinbase, Virgin Galactic (NYSE:SPCE), Palantir, Teladoc (NYSE:TDOC), Skillz (NYSE:SKLZ), and Peloton (NASDAQ:PTON).
Given the high number of very bad picks that Wood has made in the past, I recommend avoiding all of her ETFs.
Moreover, I’m not enamored with ARKQ’s second and third-largest holdings as of March 20. The sales of the ETF’s second-largest holding, robotics maker UIPath (NYSE:PATH), rose just 6.5% year-over-year last quarter, while it generated a net loss of $27.7 million, but its trailing price-sales ratio is a very large eight.
The sales of the fund’s third-largest holding, Kratos Defense & Security (NASDAQ:KTOS), climbed a very good 17% year-over-year, but its operating income dropped to $4.6 million from $10.2 million. Additionally, if the Ukraine-Russia War ends this year, KTOS stock will likely take a big hit.
Intuitive Surgical (ISRG)
Intuitive Surgical (NASDAQ:ISRG) is utilizing AI to enhance the performance of its surgical robots.
But ISRG, facing an array of small, private challengers for years since the Food and Drug Administration approved its first surgical robots in 2000, had no serious competition.
But much more ominously, Intuitive Surgical is going head-to-head with one of the world’s largest medical-device makers, Medtronic (NYSE:MDT). The latter company’s robotic-surgery tool, Hugo, was approved by the EU in October 2021, and MDT started trials of Hugo in the U.S. in Q3 of 2022.
“We expect our surgical robotics business to become a meaningful growth driver for Medtronic,” the company’s CEO stated last month, adding that the revenue from Hugo is trending higher.
Perhaps indicating that Intuitive Surgical is already beginning to be hurt by the competition, the company delivered 369 “surgical systems” last quarter, down from 385 during the same period a year earlier. The decline occurred despite the reduced, negative impact of the coronavirus previous quarter versus the same period a year earlier in America and Europe.
ISRG stock has an elevated forward price-earnings ratio of 42x.
Snowflake (NYSE:SNOW) has developed a “data platform” that enables companies to access all of their data from one location. According to SNOW, “Snowflake’s platform was designed from the ground up to support machine learning and AI-driven data science applications.”
But SNOW’s financial results and its 2023 guidance do not justify its current, gigantic valuation.
On the positive side, the company’s product revenue jumped 54% year-over-year last quarter. However, its operating margin, excluding certain items, was just 6%.
For all of last year, SNOW’s product revenue soared 70%. But for this year, the company expects the metric’s growth to slow radically to just 40%.
Moreover, SNOW expects its operating margin for all of this year to remain a very anemic 6%.
Together, this data suggests either that the company’s market is already starting to be saturated or it’s encountering growing competition, forcing it to charge relatively low prices and causing its growth to decelerate sharply.
Turning to the huge valuation of SNOW stock, the shares are changing hands at a forward price-earnings ratio of 222, with a huge price-sales ratio of 15x.
A company should have all-around great metrics and accelerating growth at that valuation. SNOW does not have either characteristic.
As of the date of publication, Larry Ramer was short COIN. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.