As artificial intelligence (AI) continues transforming industries, the hype around AI stocks has reached feverish levels. Several AI stocks are now trading at sky-high valuations, increasing new investors’ downside risks.
The global AI market is poised to reach $1.8 trillion by 2030, growing at a CAGR of 36.6%. Due to the robust expansion of the overall market, companies in the space are expected to grow at a high rate. However, despite their innovative prospects, several AI companies are grappling with fundamental challenges such as excessive burn rates, regulatory hurdles and fierce competition.
Hence, it is prudent not to be swayed away by the AI hype and identify AI stocks to sell. Here are three stocks investors might regret holding onto as the market’s exuberance dampens.
BigBear.ai (BBAI)
BigBear.ai (NYSE:BBAI) is known for its AI-driven analytics solutions. The company has been facing significant financial headwinds, resulting in a substantial decline in the stock price.
The company reported a concerning % revenue drop of 21% year-over-year (YoY) in the first quarter of 2024. This decline is alarming, especially when juxtaposed with a high net debt of approximately $195 million, further straining the company’s financial stability.
Moreover, the company’s gross margins have narrowed to 21.1%, a significant reduction from 24.2% a year ago. This margin contraction underscores the challenges in maintaining profitability, exacerbated by increases in stock-based compensation expenses.
Strategically, BigBear.ai faces intense AI sector competition, battling against established giants and nimble startups. While the company has endeavored to distinguish itself through acquisitions such as Pangiam Intermediate, which enhances its capabilities in visual AI and advanced biometrics, these moves have yet to translate into financial success.
Moreover, the company’s acquisition strategy has contributed to an already heavy debt load and dilution concerns.
iRobot (IRBT)
iRobot (NASDAQ:IRBT) has been a pioneer in home robotics. However, the company is currently navigating through significant operational and market challenges.
iRobot has faced mounting financial pressures characterized by declining revenues and shrinking margins. The termination of a highly anticipated merger with Amazon in January 2024 due to regulatory hurdles has further compounded these challenges. The fallout from this failed merger resulted in iRobot laying off 31% of its workforce, a drastic move reflecting deep structural issues rather than mere operational hiccups.
The financial impact of these strategic missteps is evident in iRobot’s performance metrics. Revenue has been on a downward trajectory, with the company reporting a significant year-over-year decline. Furthermore, the company’s gross margin has contracted sharply, highlighting the increasing costs and competitive pressures squeezing profitability.
Moreover, iRobot’s market share has been eroding in the face of intense competition from established consumer electronics firms and newer entrants offering lower-priced alternatives. This competitive onslaught has forced iRobot into aggressive pricing and promotional strategies, further eroding its profit margins.
Arm Holdings (ARM)
Arm Holdings (NASDAQ:ARM) is renowned for its chip designs, which dominate the smartphone industry. Despite the company’s strong market position and advanced technology, a deeper dive into its financial health, market challenges, and valuation suggests that now might be the time to consider selling the stock.
Arm Holdings has experienced significant growth, partly fueled by the global demand for smarter and more efficient chip technologies. However, this growth has come with its own set of challenges. For the fiscal year 2024, Arm’s revenue growth rate has shown signs of slowing down compared to previous years. This deceleration could indicate market saturation or intensified competition, which might impact future revenues.
The company’s profitability metrics, such as operating margins, have also shown volatility. After a peak in previous years, these margins have contracted due to increased R&D costs to maintain technological leadership. While such investments are crucial for long-term competitiveness, they strain short-term profitability.
Moreover, Arm Holdings’ high current valuation also raises concerns. The stock trades at a significant premium, reflecting high growth expectations that may be challenging to sustain amid increasing competition and market saturation.
On the date of publication, Mohammed Saqib did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.