In this article, we will look at the 10 Worst AI Stocks to Buy According to Reddit.

Are AI Stocks on the Rise Again?

In the lead-up to the September rate cut decision, analysts had expressed a variety of opinions regarding the 50 basis-point cut, with some supporting and others opposing it. Some of them suggested that lower interest rates could create opportunities in small and mid-cap stocks, which may benefit from a more favorable borrowing environment.

Officials at the Fed maintained the opinion that this timely monetary policy adjustment was purely based on economic data and wasn’t politically motivated. Additionally, it isn’t just influenced by recent employment data but rather as a part of a broader strategy established earlier in July, aimed at managing inflation while maintaining low unemployment rates.

Lower interest rates are now encouraging investors to reconsider their AI stock holdings or diversify their portfolios with a greater focus on AI investments. Cory Johnson, Chief Market Strategist at Futurum Group, discussed how the Fed’s rate cuts have created a positive outlook for tech spending and venture capital investment, particularly in the AI and semiconductor sectors. His opinion was covered in another one of our articles, 10 Worst Artificial Intelligence (AI) Stocks To Buy According to Financial Media. Here’s an excerpt from it:

“Johnson pointed out that there had been a reset in tech stocks when the Fed was not pivoting as quickly as investors would have liked. However, with the recent cut, there seems to be a renewed coupling between tech stocks and market sentiment. Even a reduction of 50 basis points can ease borrowing and spending, leading to increased M&A activity. He said this trend will likely result in heightened investments in technology, particularly AI.

He also highlighted how lower interest rates could accelerate the shift towards AI computing by making capital more accessible for companies looking to invest in this area. Johnson mentioned that as rates decrease, expected returns on investments look more attractive, especially in growth sectors like tech. This shift could lead to greater confidence among companies to invest in AI.”

Johnson’s insights reflect an optimistic view of tech investments in light of the Fed’s actions, suggesting that companies are exploring new opportunities within AI. At the same time, markets are seeing AI and EVs creating a new wave of power demand growth.

Michael Khouw, OpenInterest.PRO Chief Strategist, discussed that the stock market experienced a broadly lower performance recently, with the NASDAQ Composite suffering the most significant decline, down 0.5%. The S&P 500 also saw a decrease, giving up 24 points to close below 5,700, while the Dow Jones Industrial Average was down by 60 points at the time of reporting. Despite this overall downturn, the utility sector outperformed the S&P 500 year-to-date and may become even more attractive following recent interest rate cuts and as AI  and electrification drive global power demand.

Khouw discussed the current state of utilities and acknowledged that while it may seem daunting to invest in a sector that has seen substantial gains, over 7.5% total return since the beginning of last year, it is still an opportune time to consider utilities as an investment. Historically, utilities have not been perceived as a growth sector, but Khouw emphasized that they are currently trading at about 19 times forward earnings, which is relatively high compared to their usual discount to the market.

He provided historical context regarding electricity demand, noting a significant increase in demand following World War II — a 6.5-fold rise until stagnation began around 2007. He predicts that a new phase of growth in electricity demand is on the horizon, driven primarily by two factors: the rise of electric vehicles (EVs) and the increasing need for data centers fueled by artificial intelligence (AI). He estimates that by 2030, about 50% of vehicles on the road could be electric, significantly impacting electricity consumption. Additionally, expanding data centers to meet AI demands will further elevate electricity needs.

For investors looking to capitalize on this trend in utilities, Khouw suggested considering a major exchange-traded fund (ETF) that tracks utility stocks. He noted that the ETF has performed exceptionally well, gaining over 40% since October, but there are still investment opportunities. For those cautious about entering after such gains, he recommended using options strategies due to the relatively low premiums associated with utility stocks. Specifically, he proposed buying longer-dated call options and potentially selling downside puts as part of a diagonal risk reversal strategy.

This landscape indicates a promising rise in AI stocks, driven by the increasing recognition of AI’s transformative potential across various sectors. As electricity demand surges, fueled by the rise of EVs and the expansion of data centers necessary for AI operations, investors are likely to see significant growth opportunities in AI stocks as well. In that context, we’re here with a list of the 10 worst AI stocks to buy according to Reddit.

Methodology

We sifted through various Reddit threads to compile a list of 15 possible AI stocks with a short interest between 10% and 25%. We then selected 10 stocks with the highest short interest. We have also mentioned the hedge fund sentiment for each stock, as of Q2 2024. The stocks are ranked in descending order of the number of hedge funds that have stakes in them.

Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).

10 Worst AI Stocks to Buy According to Reddit

10. SoFi Technologies Inc. (NASDAQ:SOFI)

Short % of Shares Outstanding As of August 30: 17.77%

Number of Hedge Fund Holders: 29

SoFi Technologies Inc. (NASDAQ:SOFI) is a financial technology company that operates as a direct bank and supports other financial service providers through its technology platform, using AI to provide a personalized and seamless financial experience. By utilizing AI-powered algorithms, it can analyze individual financial data to offer tailored recommendations.

For the convenience of its 8.8 million users on 158 million platform accounts, SoFi Technologies Inc. (NASDAQ:SOFI) has integrated Galileo’s conversational AI engine into its app. Cyberbank Konecta, the AI assistant, can handle 80% of common inquiries, reducing response times by 65%.

The company’s competitive advantage is that it targets consumers with high credit scores through its products. This means that its customers are generally well-off individuals likely to pay back their loans, removing an element of risk from its business model.

For the full year 2024, the company expects to grow its members by 30%. In Q2 of this year, it added 643,000 new members and made $596.97 million in revenue, up 22.12% year-over-year. Combined, Financial Services and Tech Platform revenue grew 46% year-over-year and made up 45% of total adjusted net revenue. Loan sales were $1.6 billion this quarter

Continuous product innovation and brand-building are fueling significant member and product growth. The tech platform is also well on its way to becoming the go-to platform for financial services, much like AWS is for technology.

SoFi Technologies Inc. (NASDAQ:SOFI) presents a good case for robust revenue growth potential, enhanced profitability from its banking license, undervalued valuation compared to traditional banks, and strong technological capabilities. These factors position it as a promising fintech investment.

Patient Capital Opportunity Equity Strategy stated the following regarding SoFi Technologies, Inc. (NASDAQ:SOFI) in its first quarter 2024 investor letter:

“SoFi Technologies, Inc. (NASDAQ:SOFI) fell in the first quarter despite delivering strong 4Q results and 2024 guidance supported by their non-lending businesses. The company continues to gain share in the digital lending and neo-banking space, consistently growing deposits at $2B a quarter. What differentiates the company is their focus on prime and super-prime customers (average FICO 749). Sofi is early in its life cycle, currently being a small player in a very large total addressable market (TAM). With their strong management team, we believe the company will continue to deliver on their guidance of strong growth and expanding margins.”

9. MicroStrategy Inc. (NASDAQ:MSTR)

Short % of Shares Outstanding As of August 30: 13.70%

Number of Hedge Fund Holders: 26

MicroStrategy Inc. (NASDAQ:MSTR) provides business intelligence, mobile software, and cloud-based services, using AI to transform raw data into actionable insights. Its platform utilizes advanced algorithms to analyze vast datasets, identifying trends, patterns, and anomalies that would be difficult for humans to discern, powered by AI-driven analytics. It’s the world’s largest corporate holder of Bitcoin, owning 226,500 bitcoins, with a total market value of $15 billion as of August 2024.

Although the company was able to increase its total Bitcoin holdings by 5.6% in Q2 2024, this quarter met a revenue decline of 7.44%, recording a value of $111.44 million. This decline is primarily due to its ongoing transition to cloud-based services, which resulted in lower upfront revenues but laid the foundation for stronger, more sustainable cloud recurring revenue in the long run.

Subscription revenue for the second quarter was $24 million, up 21% compared to the same quarter in 2023. This growth was driven by cloud migrations and new customer acquisitions and made up 22% of the total revenue.

MicroStrategy Auto™ is its customizable AI bot that empowers users to access business intelligence insights through simple, natural language queries, eliminating the need for intricate dashboards. This AI bot can be used as a standalone application or integrated into existing third-party applications. Leveraging GenAI, the platform can automatically generate SQL queries, dashboards, and responses to user inquiries.

MicroStrategy Inc.’s (NASDAQ:MSTR) introduction of Auto Express, along with its expanded availability on cloud platforms, highlights its strategic use of AI. In terms of returns, it seems to be second only to NVIDIA. These steps position the company as a leading force in the AI industry.

Artisan Small Cap Fund stated the following regarding MicroStrategy Incorporated (NASDAQ:MSTR) in its Q2 2024 investor letter:

“Regarding MicroStrategy Incorporated (NASDAQ:MSTR), our decision to avoid this company comes down to a lack of conviction in its franchise characteristics. The stock has worked this year due to a rebound in the price of bitcoin. Since 2020, MicroStrategy has been focused on converting its cash and cash equivalent holdings, as well as issuing debt, to fund the purchase of bitcoin, which now makes up most of the company’s value.”