Multiple signals are coming in to lock in AI-generated stock profits. Goldman Sachs’ Jim Covello, the head of global equity research, pointed out that AI’s cost-to-benefit ratio is greatly lopsided, to put it mildly.
“AI technology is exceptionally expensive, and to justify those costs, the technology must be able to solve complex problems, which it isn’t designed to do.“
Jim Covello in Goldman Sachs’ Research Newsletter 129
Other contributors took a more optimistic approach, but even Daron Acemoglu, an MIT professor, believes that transformative AI apps are unlikely to happen anytime soon. In addition, Morgan Stanley’s chief investment officer, Michael Wilson, noted that a 10% market pullback is likely between now and the elections in November.
“Not because of the election but because uncertainty is likely to prevail,”
Michael Wilson on Bloomberg TV on Monday
Although having made some bearish forecasts that failed to materialize, Wilson correctly assessed stock market corrections in 2021 and 2022. A July 8th note from Citigroup analysts piling on this negative sentiment, urging that “we continue to suggest investors take profits in AI highfliers.”
Regardless of their potential for accuracy, investors are taking note of these forecasts. At the same time, the government’s economic data continues to instill distrust. After multiple jobs report revisions during 2023, this fudging trend continued into 2024, with four out of five months revised downwards, showing weakest three-month payroll growth since 2021.
Combined, these signals point to picking up profits at the tail end of an AI surge.
AeroVironment Inc.
With a 72% yearly performance, AeroVironment Inc (NASDAQ:AVAV) stock shows a severe decline in the last 30 days, with a 16% pullback, which is likely to continue. Although primarily a defense contractor for unmanned aircraft systems (UAS), the company began integrating machine learning with its Autonomy Retrofit (ARK) and AVACORE software.
To further boost autonomous capabilities, AeroVironment bought Intelligent Systems Group (ISG) in 2021 for its computer vision expertise. Given geopolitical tensions and the obvious trend of UAVs replacing manned vehicles, AVAV stock gained 166% since January 2020.
However, despite beating revenue expectations for fiscal Q4 ‘24, the company delivered a 57% decline in earnings per share, combined with the $24 million backlog decline compared to the year-ago quarter.
Lastly, the China-US tension over Taiwan, which would be the main demand point for AeroVironment’s services, is exceedingly unlikely to turn hot. But given AeroVironment’s fundamentals remaining strong, it should be put on the “buy later” consideration.
SoundHound AI
Year-to-date, this popular voice AI platform has gained 95% value. Over the last three months, however, SoundHound AI Inc (NASDAQ:SOUN) has been down 18%. In a wider market pullback scenario, a penny stock like SOUN is especially vulnerable. After all, its liquidity pool is much shallower than that of established blue-chip stocks.
This is one of the reasons the company’s executives took profits in March. In May’s Q1 earnings release, SoundHound reported 73% year-over-year revenue growth to $11.6 million while still delivering $33 million net loss, significantly up from the net loss of $27.4 million in the year-ago quarter.
At the present price of $4.20, SOUN stock is above the 52-week average of $3.28 per share and well above the 52-week low of $1.49, making it a solid candidate for profit-locking.
Nvidia
NVIDIA Corporation (NASDAQ:NVDA) is the most obvious choice for book profits as it has become the primary beneficiary of the AI narrative. Over one year, NVDA stock appreciated by 211%. Over the last three months, NVDA shares gained 50%, helped by the 10-to-1 stock split that made the chip maker’s exposure more psychologically accessible.
Rarely seen in the stock market, Nvidia’s $3.24 market cap rapidly overshadowed the GDPs of major nations, such as Mexico or Russia. From that standpoint alone, it is fair to doubt Nvidia’s fair value, especially after the insider selling spree.
Nonetheless, it remains true that Nvidia’s agility in cornering the early AI training market, coupled with full-stack AI workload software, makes a compelling case for the company to remain the dominant force in this arena.
Presently priced at $131, NVDA stock is close to its all-time high of $135.58 on June 18th while nearly double the 52-week average of $67.90 per share. That is plenty of incentives to book profits regardless of Nvidia’s sound fundamentals.
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Neither the author, Tim Fries, nor this website, The Tokenist, provide financial advice. Please consult our website policy prior to making financial decisions.