Growth stocks haven’t had it equal this year, and largely companies who have mentioned “AI” multiple times in their earnings call are on a tear so far.
Indeed, the hype behind such AI stocks is eerily similar to the tech bubble that brewed in the early 2000s, but this time with the AI segment. Back then, all things tech went up, regardless of profitability or fundamentals.
We’re witnessing the same thing this time around, and ignoring the rule of thumb and thinking, “Surely, this time is different,” is a very dangerous idea.
Of course, I’m not underestimating AI’s potential or saying it is a failed technology. However, its use cases are still limited to essay writing, coding, image generation and a few more helpful tidbits. It can get massively better at those things.
Still, it’s far from generating substantial revenue. The sector is extremely speculative, and sensationalism may exacerbate its capabilities.
Regardless, even if you have the most optimistic view about AI, that’s fine. But it is important to realize that not all AI companies are good investments right now.
These are the stocks to dump and replace with two better ones before the bubble pops:
C3.ai (AI)
C3.ai (NYSE:AI) is one of the most hyped AI stocks in the market, but its fundamentals do not justify its lofty valuation.
The company provides enterprise AI software solutions for various industries, such as energy, manufacturing, financial services, and healthcare. That’s all good and dandy, but very few people have any real idea of what this company really does.
The software it does have is obscure and many of its products aren’t even AI and are competing against well-established solutions.
The company uses a “lighthouse” strategy, which aims to secure top customers in each sector to attract their peers. But in reality, this strategy requires heavy marketing investment to gain customers. Plus, the industry bellwethers are likely to have their own AI solutions instead of relying too much on such a small company.
Its revenue growth fell from 42.9% year-over-year in the May-ended quarter last year to negative 4.3% in the latest quarter. The quarterly revenue here is $67 million, compared to $63 million in net losses. Not a good look.
Another under-addressed caveat is its reliance on a few key customers. Baker Hughes (NASDAQ:BKR) alone accounted for 45% of its total revenue in the latest reported quarter.
With all that in mind, its current valuation is ludicrous. Even Gurufocus, a very optimistic stock price model, calls it out as “significantly overvalued.” Definitely among the top stocks to dump!
Better Alternative: ACM Research (ACMR)
ACM Research (NASDAQ:ACMR) is a much better alternative to C3.ai, as it offers exposure to the AI industry while being insulated from a cooldown in that sector.
The company provides advanced wafer cleaning technologies for semiconductor manufacturers, who need to produce high-quality chips for various applications, including AI, cloud computing, 5G, and electric vehicles.
ACM Research has been growing rapidly, unlike C3.ai. Its revenue increased by 76% YOY in Q1, while its net income jumped 223%. The sales growth here has been historically high, and the company has a 9.62% net margin, which can translate into substantial profits.
One of the main advantages that ACM Research has is its proprietary technology, which enables it to clean wafers at higher temperatures and pressures than conventional methods. This gives it an edge over its competitors and allows it to charge premium prices for its products.
This stock trades at just 12 times the forward earnings multiple. The average Wall Street analyst believes it can deliver an 81.3% gain by next year.
Nvidia (NVDA)
Nvidia (NASDAQ:NVDA) is another AI stock that has been soaring to new highs, but its valuation has become stretched and unsustainable.
The company is a leader in graphics processing units (GPUs), which are widely used for gaming, data center, and AI applications. However, the price one would have to pay for NVDA is uncomfortably high.
I agree Nvidia is an essential part of the AI puzzle, but no company is shielded from competition. It has mediocre financials and the guidance is very speculative. Simply put, it’s a great business, but how high do you really think NVDA can push from here?
It’s already worth over $1 trillion and is trading at a hefty 227 P/E ratio. Even a DCF valuation taking 50% sales CAGR for the next eight years gives it a $333 valuation. The expected growth rate here for the next two years does not surpass 26% on average.
In addition, it would be foolish to underestimate Nvidia’s competitors like Advanced Micro Devices (NASDAQ:AMD), who has already partnered up with the top dog in the AI space, Microsoft (NASDAQ:MSFT).
I believe AMD can catch up quick in the AI chips race, and it has a lot of experience competing with companies like Intel (NASDAQ:INTC). It’s one of the top stocks to dump, in my book.
Better Alternative: Lasertec (LSRCY)
Lasertec (NASDAQ:LSRCY) is a much better alternative to Nvidia, as it also benefits from the AI boom while being less vulnerable to a slowdown in that sector.
The company provides inspection and measurement equipment for semiconductor manufacturers, who need to ensure the quality and reliability of their chips for various applications, including AI, cloud computing, 5G, and electric vehicles.
This stock receives almost no attention from Wall Street or from many mainstream analysts, despite the fact that this is another essential part of the semiconductor puzzle.
Lasertec has been delivering excellent results, as its revenue increased by 46.3% year-over-year in fiscal 2021, while its net income surged by 118.5%.
This company has an industry-leading net margin of 29.3%, ranked better than 92.7% of its peers.
If that’s not enough, the company is expected to end 2023 with $991 million in sales, with 63.3% YOY growth. That metric is expected to reach $2.1 billion in 2025 and continue ballooning.
I would also note that this is the leading company that can provide mask inspection equipment for extreme ultraviolet lithography, a key technology for producing advanced chips.
This gives it a monopoly over this niche segment and a high barrier to entry for potential competitors. It has well-established relationships with key customers such as Samsung and Taiwan Semiconductor Manufacturing (NYSE:TSM), who are leading the way in chip production. This is a solid replacement for anyone interested in NVDA.
On the date of publication, Omor Ibne Ehsan 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.