Artificial intelligence has been the talk of the town over the past few months, setting AI stocks on fire.
Many mega-cap companies have joined the fray, investing billions in advancing the next-generation iterations of AI technology. Thus, whether we’re talking pure-play AI stocks, or companies making strategic pivots into this area, it’s clear that investors are assigning a premium to stocks of companies operating in this space.
However, tech behemoths may not be the best AI stocks to invest in if you’re looking for big returns from artificial intelligence. Investors have hyped many smaller AI-focused companies up, but they are not performing as expected.
That said, the incredible hype around this space has led to incredible valuations, for some otherwise little-known companies.
Here are three such stocks I think investors should put in the “over-hyped” AI stocks bucket, at least for now.
Berkshire Grey (BGRY)
Berkshire Grey (NASDAQ:BGRY) is an AI robotics company specializing in e-commerce order fulfillment. With a stock price below $1.50, it operates in a sector projected to grow around 13% annually until 2030.
Major players in the industry, such as Amazon, aim to cut labor costs, providing ample opportunities for Berkshire Grey to thrive.
Berkshire Grey is facing cash runway challenges, with approximately 7 months of cash remaining based on its current spending rate. The company needs to either reduce its cash burn or secure additional funding to sustain its operations.
As Berkshire Grey continues to increase its cash burn, investors may be concerned about how the company will raise additional funds if necessary. Common methods include issuing new shares or taking on debt.
With a market capitalization of $332 million and a cash burn of $130 million, which is 39% of its market value, significant dilution could occur if the company needs to sell shares to cover its expenses for another year.
Investors’ confidence in Berkshire Grey Inc plays a significant role in determining the stock’s price. Positive expectations and events attract buyers, driving the price up, while a loss of confidence leads to selling and a decline in the stock price.
SoundHound (SOUN)
SoundHound AI (NASDAQ:SOUN) stands out as an appealing AI penny stock because of its innovative approach in conversational AI and its expansion into the automotive industry.
With a focus on creating natural tech-human interactions, the company aims to integrate voice assistants into vehicles. Considering the potential market size, as voice assistants become commonplace in 90% of new cars, SoundHound AI has significant growth opportunities.
Despite the company’s promising prospects, SOUN stock is not without risks. The company has yet to turn a profit and may need to resort to debt or share offerings for funding.
SoundHound heavily relies on a few major customers, making it vulnerable to revenue loss if any of them withdraws. Additionally, the voice AI market is becoming increasingly competitive, posing a risk of technological advancements leaving SoundHound behind.
While SoundHound AI boasts a strong client base and operates in sustainable segments, like many AI companies, it has faced consistent losses.
As an investor, it is important to approach the AI hype with caution, considering the financial performance of such companies.
Cerence (CRNC)
Cerence (NASDAQ:CRNC) is an overlooked AI stock operating in a promising sector. But there are some areas investors should look into.
Investors seeking average market returns can opt for low-cost index funds. However, not all stocks perform as well as the market.
With Cerence, its share price has only increased by 24% in the past three years, lagging the overall market performance. The share price has experienced a decline of 13% in the past twelve months.
With that decline, Cerence is performing worse than the overall market. However, over the past three years, the stock has shown an average annual return of approximately 7%. While the recent weakness could be seen as an opportunity, it’s important to assess the company’s long-term quality before making any decisions.
Cerence shareholders should note insider selling, which may raise concerns. While it’s not the sole basis for decision-making, monitoring insider transactions can provide valuable insights for investors.
On the date of publication, Chris MacDonald did not have (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.