Growth in artificial intelligence spending is red hot, but which stocks should be avoided? 24/7 Wall Street Analyst Eric Bleeker looks at three stocks he’s avoiding and thinks investors would be wise to steer clear of. Here’s why C3.ai, Intel, and Baidu are all stocks Eric’s avoiding right now.

3 AI Stocks To Avoid 

You can watch the video above to see Eric’s complete discussion. However, some of his key points are highlighted below.

Why Avoid C3.ai 

Eric starts with C3.ai (NYSE: AI). And notes the following:

• C3 AI hit the markets in 2020 and was one of the first stocks with an AI narrative it could sell, so it initially saw huge share gains.
• Yet, the reality is – this is a company that’s always been chasing being associated with the hottest trends in technology. It first chased climate change technology, then the Internet of Things, and has now landed up building enterprise AI products.
• Revenue growth was just 5% last year and is back up to 18% in the latest quarter, which is an improvement. However, this growth rate is also lagging almost every company with real exposure to recent AI trends.
• The company also still has trailing free cash flow of negative $100 million, and stock-based compensation of $200 million on top that.
• It’s simply a company that’s always been looking for an end market people are talking about first and backing into a product. There are other, more innovative software plays for the AI space like Palantir (NYSE: PLTR).

Why Intel is Still an Avoid 

• Intel (Nasdaq: INTC) is a company where it’s easy to understand the investing story. It has a market cap of $135 billion versus Taiwan Semiconductor sitting at around $675 billion. If their foundry move works, it’s an extremely lucrative industry across the next decade.
• However, this is going to be an extremely long transition. In addition, while Intel continues shifting toward a foundry model it continues losing market share in its cash cow businesses like server chips.
• If you’re serious about exposure to the foundry side, another option is buying a key supplier to Intel like ASML (Nasdaq: ASML). It’s reported that Intel purchased all High-NA machines that ASML is slated to produce in 2024, at a cost of just under $400 million each. Intel’s rise gives another leading-edge option for ASML, and any growth in Intel’s business will continue accruing to them as Intel has few other options for leading-edge machinery.

Baidu Looks Like It’s Still A Value Trap 

Finally, Eric zeroes in on Baidu, which has been promoting its wins across AI.

• The company posted a quarterly beat which got some attention this week. However, revenue growth has largely stalled out and profits have declined since 2020.
• Baidu made a lot of noise about progress in self-driving cars and other areas of AI such as their AI chatbot which they said reached 200 million users,
• But scale matters in growth areas like AI and cloud computing, and the company is at the wrong end of scale compared to Tencent and Alibaba. Baidu is now worth just $39 billion while Alibaba is worth $215 billion, for example. There’s a reason the largest American tech companies like Microsoft, Google, and Amazon dominate cloud computing stateside.
• It’s simply difficult to see Baidu’s advantage in chatbots lasting for the long-term or producing the kinds of profits to make them a big winner in the Chinese AI ecosystem.

Transcript:

Right, Eric, the topic of the last 18 months on every investor’s mind has been AI.

We’ve all watched the absolutely incredible run that Nvidia has produced.

We’ve watched these sort of, let’s call them stretched multiples, not saying it’s without enthusiasm, but multiples have expanded in this AI enthusiasm and have people have sort of realized the potential that AI stands to benefit both humanity and investors.

People have crowded in. But that’s resulted in a couple of stocks that might be overpriced and we might want to avoid today.

You’ve highlighted three AI stocks that investors should steer clear of. What are we looking at today?

Yeah, so I wanted to feature three because there are some great names to buy in the space.

So you don’t want to be buying pretenders who are kind of going off the narrative or get the upside of AI.

The first one I want to highlight is C3 AI.

Awesome.

This is a company that’s named C3 because it was originally about carbon in its name. That’s to say it was a company focused on climate change. Then it rebranded to C3 IoT. And now it is C3AI.

So I think this is a company that, you know, sells enterprise software. They do have real sales that did accelerate in the past year, 18% revenue growth from previously 5% in 2023, but it is also losing quite a bit of money.

I believe it has negative free cash flow of a hundred million.

So this is a company, I just believe it’s cashing in on the narrative, more than it has true promise in AI.

Interesting. So, I mean, anytime you see a company making an intense industry pivot like that or focus pivot, let’s call that a red flag at a minimum.

And now there’s a stalwart name on this that a lot of investors will recognize. Now, this is a company that actually can appeal to a lot of people for a lot of different reasons. It can appeal to manufacturing investors. It can appeal to blue-chip investors. At one point in its history, it appealed to income investors.

What’s AI stock number two we want to avoid if you’re trying to benefit from this trend?

Yeah, and I put Intel on there, and I totally understand the narrative.

They’re making a pivot to running a foundry business. That’s what Taiwan Semiconductor does. It’s what’s led them to a valuation of more than 700 billion, which is substantially more than Intel.

But this is going to be a very long transition. In the meantime, Intel continues to bleed market share in some of its cash cow businesses like servers to a company like AMD.

So I would rather, if you’re looking to play this trend with a lot of sovereign AI and bringing production back to America, I would look at a company like ASML, which is Intel’s key supplier.

Intel has presumably bought up a lot of their machines, their most advanced machines that are upcoming that cost up to $400 million each.

So if you’re looking for the upside and security rather than Intel, I would make ASML a stalwart in my portfolio.

Okay, now moving on to number three. This is a stock that has gone through many different hype cycles over the years. It’s got some geopolitical risks, certainly.

What is AI stock number three that investors need to steer clear of?

Yeah, and the last one I wanted to feature was Baidu.

They had beat earnings in the past week, which got some publicity.

Another headline that they’ve been featured in is, They have kind of the equivalent to ChatGPT over there, a chatbot that has surpassed 200 million users.

The unfortunate reality, though, is Baidu with a valuation of sub $40 billion. It’s just too small in an area that’s going to require intensive resources to compete against larger companies beyond ByteDance.

We’re looking at Tencent.

And we’re also looking at Alibaba.

So I just don’t like their competitive positioning within China.

It’s a stock that saw somewhat of a large run-up in late 2020 into 2021 but otherwise has been flat.

If you’re looking at this based on the hype, I just think there are more compelling companies out there that’ll offer a higher upside.

 

 

If you’re looking at this based upon the hype, I just think there are more compelling companies out there that’ll offer a higher upside.

 

 

 

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