Artificial intelligence is all the rage these days, there’s no arguing that point. As research cited by Bloomberg pointed out, the field of generative AI could become a $1.3 trillion market by 2032. I don’t generally use Wikipedia as a source. Roughly speaking, though, a valuation of over $1 trillion would put you into the top 20 global economies. Still, we’ve got to talk about overhyped AI stocks.
The problem is that just because the space is booming doesn’t necessarily translate to stratospheric results. We only need to look back in recent history to understand this point. Back in the late 1990s, the Internet market took off. Futurists recognized the global digital network as a profound opportunity. It was very much so. However, that didn’t prevent the dot-com bubble from forming and popping.
It wouldn’t be surprising to see the same situation happen with machine intelligence. Yes, the innovation is profound. But the hype at this moment might not match the actual benefits. With that in mind, below are overhyped AI stocks to consider trimming.
Nvidia (NVDA)
I know that mentioning semiconductor giant Nvidia (NASDAQ:NVDA) in anything less than glowing terms is risky. To be sure, there’s zero doubt that NVDA stock has blown past expectations. Since the start of the year, shares gained over 115%. In the past five years, the equity has soared almost 2,500%. At the same time, it also appears that much of the enthusiasm is priced in.
Right now, shares trade at 32.43X trailing-year sales. I understand the point that analysts project robust growth in the years ahead. For fiscal 2025 (calendar 2024), analysts are projecting revenue of $120.73 billion. That’s up 98.2% from the prior year’s tally of $60.92 billion. And in the following year, the company may generate sales of $164.8 billion.
However, there are signs that NVDA stock is getting stretched. Over the past four quarters, the magnitude of earnings surprises has slipped from 28.6% down to 8.9%. What’s more, even assuming the increased sales in fiscal 2025, NVDA would still command a hot premium of around 21X.
Fundamentally, it may be difficult to justify such a multiple unless the actual gains from AI are worth the cost. Therefore, I view NVDA as one of the overhyped AI stocks to be cautious of.
CXApp (CXAI)
One of the smaller entities in the broader machine intelligence space, CXApp (NASDAQ:CXAI) falls under the application software industry. Per its public profile, CXApp provides a workplace experience platform for enterprise customers. Mainly, it brings to the table its namesake platform, which features native mapping, analytics, on-device positioning and other technologies pertinent for various uses.
Unfortunately, the issue with CXAI is that it may be one of the overhyped AI stocks. Since the start of the year, shares gained over 67% of equity value. However, this performance doesn’t take away from the fact that in the past 52 weeks, shares have lost nearly 69%. Also, since hitting a peak in April, CXAI has been extremely volatile.
Part of the problem is that the company isn’t consistently profitable. In the trailing 12 months (TTM), CXApp generated revenue of $7.22 million. With a shares outstanding count of 15.27 million, it’s currently trading at 4.42X sales.
That might sound discounted and with revenue projected to eventually hit $15 million by the end of fiscal 2025, it could be. However, investors may be skeptical due to the severe losses. I’d be very cautious about this enterprise.
Tesla (TSLA)
While not a pure-play AI enterprise, electric vehicle manufacturer Tesla (NASDAQ:TSLA) is investing heavily in the space. After all, the company seeks to be a leader in automated mobility, which would require significant advances in deep learning and neural networks. However, TSLA could be one of the overhyped AI stocks to be cautious about.
Yes, Tesla went on a big run between late June to early July. However, the air of the rally has been steadily bleeding out since then. And recently, TSLA stock incurred a 4% loss. A recall impacting 1.8 million vehicles isn’t helping matters. However, as Barron’s pointed out, fatigue regarding its latest rally could be responsible for the July correction.
Further, the company is struggling amid weak demand for EVs. This matter could be exacerbated if Donald Trump takes office again. Sure, there is an argument that because Tesla CEO Elon Musk is a Trump supporter that his company won’t be as impacted from Trump’s efforts to roll back President Joe Biden’s green initiatives.
Personally, I’m not sure that makes much sense. EV headwinds will give legacy automakers a lifeline. Later on, that lifeline could ironically help such manufacturers transition to EVs when the condition is right. Thus, TSLA may very well be one of the overhyped AI stocks to avoid.
On the date of publication, Josh Enomoto 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.