Despite the buoyant state of U.S. equities, with the Nasdaq Composite boasting a year-to-date gain of 17.8% and the S&P 500 climbing 14.7%, not every U.S. stock stands as a sure bet. The technological surge of generative artificial intelligence (AI) orchestrate an unprecedented rally in equities, including stocks that were only faintly associated with AI.
Yet, the reality is that some of these stocks are overhyped, with their share prices on a ticking clock until the bubble bursts, regardless of favorable macroeconomic indicators. In this piece, we take a closer look at three such overhyped stocks that have enjoyed share prices surge in the past year, but are likely to experience a drop in the near future.
The first company under scrutiny is the data analytics behemoth, Palantir (NYSE:PLTR). Garnering a strong following among investors, particularly those frequenting the subreddit r/WallStreetBets, Palantir enjoys a favorable reputation in the software space, beyond its beloved CEO Alex Karp and co-founder Peter Thiel. Its software products, Gotham and Foundry – designed for governments and defense agencies and contemporary enterprises respectively – have gained considerable traction.
The announcement of a new AI Platform by Palantir, aimed at helping businesses incorporate large language models (LLMs) into their data pipelines and workflows, pushed shares to soar by 58.4% over the past year. However, the company’s Q1 earnings report for FY24, while exceeding Wall Street forecasts, set a lower guidance than predicted, indicating that the much-hyped AI Platform might not deliver the growth investors were counting on and suggesting a possible decline in share prices this June.
Next in line is the AI startup, SoundHound AI (NASDAQ:SOUN), another company whose technology has been overvalued. SoundHound’s Voice AI product, offering high-quality conversational experiences to businesses, saw the company’s shares skyrocket by 320.3% within the year, following an investment by AI chip giant Nvidia (NASDAQ:NVDA).
However, questioning the uniqueness of SoundHound’s product and forecasting impending stiff competition has significantly deflated investor enthusiasm. Despite a solid Q1 earnings report noting an increase in revenues and a narrower net loss, the firm’s shares have plummeted over 54% in the past three months.
The final stock on our list is the renowned electric vehicle (EV) manufacturer, Tesla (NASDAQ:TSLA). Although Tesla has always rode a wave of hype, thanks to its powerful branding and the controversial figure of CEO Elon Musk, the company’s share price has taken a significant hit in 2024.
Higher interest rates and escalating inflation have taken a toll on the broader EV market, resulting in a slowdown in items such as deliveries and growth in earnings. Tesla, unfortunately, seems to be at the forefront of the struggling EV makers, with a decline in Q1 deliveries year-over-year for the first time since 2020 and ineffective price cuts. Furthermore, the cold reception of new offerings like the Cybertruck has done the company no favors. With Tesla shares already down 25.6% since the start of the year, a lack of swift recovery in EV sales and deliveries could send the share price spiraling even further downwards.
These three stocks, despite their past successes, exhibit significant signals of being overhyped. Investors would be wise to consider selling off these stocks this June before their share prices take a nosedive.
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