In this article, we’re going to talk about the 10 worst artificial intelligence (AI) stocks to buy according to financial media.
Is a 0.5% Rate Cut Aggressive?
Analysts have long predicted interest rate cuts and the Fed just lowered rates by 0.5% on September 18th. This is the first rate cut since the pandemic, driven by concerns about the labor market, and was followed by market volatility. The new benchmark rate is between 4.75% and 5.0%, with more cuts expected. Fed Chairman Jerome Powell stated that these cuts are based on economic data, not political factors.
We have had several analysts supporting or opposing the 50 basis-point rate cut, both before and after the announcement was finally made. We recently discussed the President at Potomac Wealth Advisors, Mark Avallone’s, stance on this aggressive decision made by the Fed. Here’s an excerpt from our article on the 10 Worst Small Cap AI Stocks To Buy According to Short Sellers, that covered his opinion:
“Mark Avallone expressed surprise at the Fed’s decision but emphasized that investors shouldn’t make impulsive decisions, but rather utilize potential opportunities in small and mid-cap stocks, which he believes will benefit from a lower interest rate environment…. Avallone warned investors to be cautious with traditional banks, especially mid-sized and large ones, based on his experience at Bank of America. He believes that the recent changes in loan pricing after the Fed’s rate cut would hurt banks’ overall revenue and income from interest…. He suggested that it may be too late for significant moves in fixed-income investments, as many investors have already lengthened their bond durations. He recommended pausing further adjustments until it’s clear whether the rate cut is due to an economic slowdown or a preemptive action.”
After announcing that the Central Bank has lowered interest rates by half a point, Fed Chair Jerome Powell took questions from reporters regarding this first-ever cut decision since 2020. He emphasized their commitment to timely monetary policy adjustments, particularly in light of the current economic landscape. The Fed believes they aren’t behind the curve, and the decision to cut rates reflects a strong commitment to avoid falling behind.
In response to a question about whether the rate cut was influenced by recent employment data or the high nominal level of the federal funds rate, he clarified that their policy position was established in July 2023, a period characterized by high inflation and low unemployment. He highlighted their patience in reducing the policy rate, noting that other central banks had already implemented multiple cuts while the Fed had refrained from such actions until now. This patience has reportedly paid off, as there is now greater confidence that inflation is trending sustainably toward the 2% target.
Powell indicated that the recent rate cut should not be interpreted as a new pace for future adjustments but rather as part of a recalibration of policy toward a more neutral level. He referred to the Summary of Economic Projections (S.E.P.) as a guide for understanding potential future cuts, emphasizing that economic developments could lead to adjustments in either direction.
When asked about implications for balance sheet policy following this larger rate cut, he noted that reserves within the banking system remain stable and abundant. He clarified that there are no plans to halt balance sheet runoff as a result of this decision, indicating that both monetary policy easing and balance sheet management can occur concurrently.
With a lower interest rate environment, investors everywhere are looking to either make a decision about their current AI stock holdings or diversify their portfolios with a higher ratio of AI stocks. But how has the September cut really impacted the AI sector? The Futurum Group Chief Market Strategist, Cory Johnson, just discussed what Fed rates mean for the tech sector as they invest more into artificial intelligence.
The recent decision by the Fed to lower interest rates has initiated a ripple effect in the tech sector, which can lead to increased tech spending and potentially larger venture capital investments. Corey Johnson noted that the current environment is favorable for tech stocks.
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.
As for venture capital, Johnson noted that there is significant activity in the Bay Area, particularly with semiconductor startups. He observed that many new projects have been announced recently, indicating a robust interest in this sector. Interestingly, he pointed out that securing funding often happens before a product is fully developed so investors are increasingly focused on assembling the right teams rather than just having a finished product.
Overall, Johnson’s insights reflect a positive outlook for tech spending and venture capital investment in light of the Fed’s rate cuts, particularly within the AI and semiconductor sectors. As companies adapt to changing financial conditions, Powell’s discussion of the Fed’s strategic approach presents investors with both opportunities and challenges. We’re here to help you navigate the situation better with a list of the 10 worst artificial intelligence (AI) stocks to buy according to financial media.
Methodology
To compile our list, we sifted through rankings of AI stocks on different financial media websites to compile a list of 20 possible AI stocks. We then selected the 10 stocks that were the least popular among elite hedge funds and that analysts were bearish on. The stocks are ranked in descending order of the number of hedge funds that have stakes in them, as of Q2 2024.
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 Artificial Intelligence (AI) Stocks To Buy According to Financial Media
10. Snap Inc. (NYSE:SNAP)
Number of Hedge Fund Holders: 44
Snap Inc. (NYSE:SNAP) operates some famous technological products, namely Snapchat, Spectacles, and Bitmoji. Snapchat, famous for its filters and lenses, focuses on providing a camera-first platform for communication and self-expression, where AI powers features like augmented reality lenses, personalized content recommendations, and automatic image stabilization.
The company’s main advantage over competitors is its focus on user privacy. However, being a consumer-focused company also makes it vulnerable to economic downturns. As advertising revenue is its primary source, it thrives when inflation is low and businesses are doing well.
Its paid subscription service, Snapchat+, has grown quickly, reaching 9 million subscribers by the end of Q1 2024, aiming for 14 million subscribers by the year-end.
Over the past year, Snap Inc. (NYSE:SNAP) added 35 million users, bringing the total user count to 432 million by the end of June, up 9% year-over-year. In Q2 alone, the company gained 10 million users sequentially, mostly coming from outside of the US, Canada, and Europe.
Snap Inc.’s (NYSE:SNAP) Q2 2024 revenue increased 15.84% year-over-year to $1.24 billion. There were 850 million monthly active users and 432 million daily active users. Advertising revenue grew 10% to $1.13 billion.
In this quarter, it launched a GenAI Lens in collaboration with Beyoncé, dedicated to her new COWBOY CARTER album, which was engaged 80 million times in the first 3 days. It also renewed its longstanding sports partnerships with the NFL, NBA, and WNBA, to provide official content across Stories and Spotlight.
The company is expected to benefit from advertisers shifting spending away from TikTok. New AR filters and improved targeting and measurement tools position it for success. This could increase revenue by $100 million in the second half of 2024, with expected Q3 revenue growth of 12-16% year-over-year.
RiverPark Large Growth Fund stated the following regarding Snap Inc. (NYSE:SNAP) in its first quarter 2024 investor letter:
“Snap Inc. (NYSE:SNAP): SNAP was our top detractor in the quarter despite reporting fourth quarter results generally in line with or better than expectations. Revenue growth of 5% was roughly in line with investor estimates and at the high end of guidance, and EBITDA of $159 million was $49 million better than estimates. Daily Active Users (DAUs) were also ahead of investor expectations, ending the quarter at 414 million (about 2 million better), driven by continued innovation in Snap’s offerings. Revenue guidance for 1Q24 was also roughly in line with investor estimates, but EBITDA guidance of negative $55-95 million was well below estimates. The company pointed to increased infrastructure costs and a US focused marketing campaign for the lower-than-expected margin guidance.
Although the company continues to face near-term macro headwinds, we believe SNAP can accelerate its revenue growth over the next several years. With 2023 revenue expected to be $4.6 billion (as compared with Meta’s $134 billion), we believe SNAP has a long runway for both revenue growth and expanded profitability as it improves platform functionality, continues to grow its audience (daily active users continue to grow at a double-digit rate), and expands its monetization.”
9. Gitlab Inc. (NASDAQ:GTLB)
Number of Hedge Fund Holders: 39
Gitlab Inc. (NASDAQ:GTLB) is an open-core company that operates GitLab, a DevOps software package, that can develop, secure, and operate software. This platform provides a comprehensive set of tools for collaboration, version control, and continuous integration/continuous delivery (CI/CD). AI plays a significant role here, powering features such as code analysis, vulnerability detection, and intelligent code suggestions.
GitLab Duo (an AI-powered platform) has demonstrated impressive productivity gains, including a 90% reduction in toolchain operation time and 50% faster lead times and vulnerability detection. Big clients like Barclays and F5 are adopting this platform.
FQ2 2025 revenue rose 30.81% year-over-year to $182.58 million, driven by new clients like Delaware North and Guild Mortgage, along with growth from existing customers. The earnings per share were logged at $0.15.
The company was recognized as a Leader in the inaugural 2024 Gartner Magic Quadrant for AI Code Assistants and maintained its Leader status in the 2024 Magic Quadrant for DevOps Platforms for the second consecutive year.
A survey of ~5,000 DevSecOps (platform to foster collaboration among teams) professionals shows that 62% use over 5 tools, and 64% want to consolidate. This presents a great opportunity for the company to help customers replace legacy solutions and reduce costs. Gitlab Inc. (NASDAQ:GTLB) is well-positioned to benefit from the growing use of AI in software development.
Baron Discovery Fund stated the following regarding GitLab Inc. (NASDAQ:GTLB) in its Q2 2024 investor letter:
“We are huge believers in the practical uses of AI, and we have several investments in companies that adapt AI models to enhance their products and services. These include companies like GitLab Inc. (NASDAQ:GTLB), SentinelOne, Inc., and Couchbase, Inc., which were among our top detractors at one point in the second quarter (GitLab and SentinelOne recovered significantly in the last week of the quarter). As of the second quarter at least, the market has just not been ready to reward AI companies beyond those providing “picks and shovels.” This led to all three of these companies trading at or near all-time low valuation levels during the quarter. Nevertheless, we believe that in the coming quarters the market will broaden its level of interest from AI hardware to “adaptive AI” investments like GitLab, SentinelOne, and Couchbase. In that scenario, all three of these stocks have significant upside potential.
GitLab is a subscription software company that enables enterprise software developers to develop new software applications rapidly and securely for their firms. GitLab uses AI to help with code suggestions, to check for holes in security, and to automate collaboration among the many developers within an enterprise. GitLab recently launched a product called Duo that we believe will provide revenue upside for the company and enhance the competitiveness of their product of offerings. SentinelOne is a cybersecurity company that provides endpoint protection (a much more advanced version of legacy “anti-virus” software) both at customers’ physical sites and in the cloud. It uses AI to detect anomalous behavior on the network and to automate the remediation of the security flaws that led to the intrusion. Both companies are recurring revenue entities, with high gross margins (78% for SentinelOne and 90% for GitLab) and are growing rapidly (revenue growth of 25% or more). Yet both are trading at or near all-time low valuation levels. GitLab shares dropped 14.7% in the quarter despite raising full-year revenue and earnings guidance. This was partly due to a health issue with the CEO (cancer recurrence which he believes is very treatable). We see GitLab revenues growing at a compounded rate of 26% through 2028 with free cash flow growing five-fold over current levels. Again, we see the stock doubling over this time.”
