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.”
8. Arm Holdings (NASDAQ:ARM)
Number of Hedge Fund Holders: 38
Arm Holdings (NASDAQ:ARM) is a semiconductor and software design company that licenses its technology to other companies for use in their products. It specializes in designing energy-efficient processors and other components that are used in a range of devices, including smartphones, tablets, and IoT devices, using AI to enable features like machine learning, natural language processing, and computer vision.
The company has recently been gaining market share in automotive and cloud services, although there are challenges in IoT and networking equipment due to inventory adjustments in the industrial sector.
FQ1 2025 revenue grew 39% year-over-year to $939 million, the highest quarterly revenue to date. Licensing revenue was up 72%, and royalty revenue rose 17% year-over-year. Armv9’s adoption and a recovering smartphone market drove royalty revenue growth. Smartphone royalty revenue increased over 50% compared to the prior year, even though unit sales only grew slightly.
The iPhone 16, featuring Arm Holdings’ (NASDAQ:ARM) A18 chip, highlights its leadership in mobile and AI technology. This partnership surrounding the iPhone 16 has driven a 60% increase in its stock price in 2024.
The company has also been added to the PHLX Semiconductor Sector Index (SOX) this week. This reflects its rapid growth and diversification as a foundational compute platform across various technologies.
Arm Holdings’ (NASDAQ:ARM) launches of the Axion processor and Ethos-U85 for edge AI demonstrate its leadership in the growing AI market. Windows on Arm PCs and ongoing demand for compute subsystems across mobile, cloud, and automotive sectors further strengthen its position as a leader in the tech ecosystem. With a network of ~20 million software developers, the company is well-positioned for growth.
7. Fabrinet (NYSE:FN)
Number of Hedge Fund Holders: 31
Fabrinet (NYSE:FN) is an electronic manufacturing company that provides optical packaging and precision optical, electro-mechanical, and electronic manufacturing services, primarily serving original equipment manufacturers (OEMs). It has over 12,000 employees worldwide in various markets, including developing and producing AI-powered devices, supporting the broader AI ecosystem.
In the fourth fiscal quarter of 2024, the company made a revenue of $753.26 million, up 14.85% from the same quarter in the previous year. The earnings per share were $2.41. Both of these financials beat Street estimates. This marked the fourth consecutive quarter for the company with record revenues and EPS figures.
Datacom revenue grew over 120% year-over-year, offset by a telecom revenue decline of over 20%, due to the protracted inventory digestion across the telecom industry.
The company’s revenue is growing due to new AI products in datacom. Despite negative AI stock sentiment, its strong growth in fiscal 2024 makes it worth considering. 800 gig products for AI and related applications remain its largest revenue driver in Datacom, partially offsetting the completion of a long-running 100 gig program.
Non-optical communications revenue grew double-digits, driven by automotive recovery. The company expects sequential revenue growth from all major product categories in Q1 of fiscal year 2025. It’s also investing in expanding its manufacturing capacity with Building 10 in Chonburi.
Fabrinet (NYSE:FN) plans to repurchase up to $139.5 million of its own stock, an expansion of its existing stock buyback program. In the FQ2 2025, it repurchased ~21,000 shares, with a total of 212,000 shares for the full fiscal 2025. This buyback program improves investor sentiments, and AI expansion strategies position the company for long-term growth.
FPA Queens Road Small Cap Value Fund stated the following regarding Fabrinet (NYSE:FN) in its Q2 2024 investor letter:
“Fabrinet (NYSE:FN) is a contract manufacturer of optical communications components and modules. The company has a dominant position in hard-to-replicate precision-manufacturing technologies and an enviable track record of execution. The majority of Fabrinet’s sales are to networking equipment manufacturers, but it has been successfully diversifying into the data center, industrial, auto, and medical end-markets. FN’s stock jumped after reporting June 2023 earnings – datacenter sales increased 50% sequentially and more than 100% over the previous year, driven by their 800-gigabyte transceivers for Artificial Intelligence applications. The company also announced that Nvidia is a 10%+ customer.
Fabrinet was a top-five holding in the Fund before its June 2023 earnings announcement. Since then, the stock has appreciated considerably and we have trimmed in keeping with our risk management policies. Given the growth in its forward earnings estimates, Fabrinet trades in line with its historical earnings multiples and remains a top five position for us.”
6. Bloom Energy Corp. (NYSE:BE)
Number of Hedge Fund Holders: 29
Bloom Energy Corp. (NYSE:BE) manufactures and markets solid oxide fuel cells that produce electricity on-site, using a variety of fuels, including natural gas, biogas, and hydrogen. It also uses AI to optimize the performance of its fuel cell systems, improve efficiency, and enhance predictive maintenance capabilities to make solutions more reliable, cost-effective, and sustainable.
In Q2, revenue grew 11.52% to $335.77 million. AI-driven data centers and increased focus on reducing carbon emissions are driving demand for affordable fuel cell technology. Analysts predict a 24% revenue increase next year and expect the company to become profitable in 2025, with a projected profit of $26 million. To achieve this, the company needs to grow by 78% year-over-year.
The company’s fuel cells offer reliable, sustainable, and efficient power for data centers. They operate independently of the grid, reducing outage risks, and can be integrated into microgrids for added energy security.
Bloom Energy Corp. (NYSE:BE) partnered with CoreWeave, an AI company, in July. Bloom Energy Corp. (NYSE:BE) will power CoreWeave’s data center in Illinois, supporting its AI cloud solutions. This deal contributed to a 1.3% stock surge on July 17th. Bloom Energy also partnered with Silicon Valley Power to supply 20 megawatts of fuel cell power to AWS data centers in Santa Clara, aligning with the trend of using clean energy for data center operations.
The company announced a breakthrough in its SOFC technology in August, developing a hydrogen-powered fuel cell with 60% electrical efficiency and 90% combined heat and power efficiency. Its SOFC technology emits significantly less nitrogen oxides than traditional combustion systems.
Although hydrogen is currently more expensive than traditional fuels, the company’s electrical efficiency breakthrough could make hydrogen economically viable. This makes its fuel cells a cleaner option for electricity production. This also positions the company to become a leader in its sector.
ClearBridge Investments made the following comment about Bloom Energy Corporation (NYSE:BE) in its Q3 2022 investor letter:
“We were active in repositioning the portfolio in the quarter as market crosswinds opened idiosyncratic opportunities, adding two new industrials companies. Bloom Energy Corporation (NYSE:BE) is an electrical equipment company that makes solid-oxide fuel cell systems for on-site power generation, serving a variety of industries. Its fuel cells convert natural gas, biogas or hydrogen into baseload (non-intermittent) electricity without combustion, so there is low or no carbon emission. We expect significant upside through its ability to support the growing hydrogen economy, with a large opportunity for this in South Korea and meaningful policy support in the U.S. via the IRA, while other markets include biogas, carbon capture and marine transportation. Its natural gas energy server business is growing in the U.S. amid higher grid reliability concerns.”
5. Informatica Inc. (NYSE:INFA)
Number of Hedge Fund Holders: 28
Informatica Inc. (NYSE:INFA) is a leading provider of data integration and management software that includes products like enterprise cloud data management to help businesses collect, organize, and analyze data from various sources. It leverages AI to automate data integration processes, improve data quality, and enable advanced analytics.
It is the industry’s only cloud data management platform with AI and GenAI capabilities for modern enterprises, ever since the launch of CLAIRE GPT, its GenAI chat interface, on the Intelligent Data Management Cloud (IDMC) platform. Since its launch, 150+ enterprise customers have consumed IPUs on CLAIRE GPT usage, primarily for data discovery and exploration use cases.
In Q2, total revenue grew 6.55% year-over-year. Subscription ARR was up 15%, with cloud subscription ARR growing 37%. The company hit a record $703 million in cloud subscription ARR, while the average subscription ARR per customer was up 17%. Customers spending over $1 million increased 28%, and those spending over $5 million grew 30%.
American Airlines, the world’s largest airline, purchased Cloud Data Quality to improve real-time customer service. A major GPU supplier chose Informatica Inc.’s (NYSE:INFA) IDMC platform, which includes MDM, Data Quality, Data Integration, and Data Governance capabilities. Approximately 26% of the new cloud ARR in the past year came from on-premise to cloud migrations.
PowerCenter Cloud Edition is being adopted by many customers, accounting for over 80% of modernization deals in Q2. Westpac, a major Australian bank, has expanded its partnership with this company, transitioning from PowerCenter to IDMC.
Informatica Inc. (NYSE:INFA) is innovating its IDMC, enhancing data ingestion and integration. With ~$1 billion in R&D and IDC recognition, IDMC processed 97 trillion cloud transactions in June, a 59% year-over-year increase, making the company well-positioned for continued growth in the evolving data management and AI landscape.
4. Upstart Holdings Inc. (NASDAQ:UPST)
Number of Hedge Fund Holders: 18
Upstart Holdings Inc. (NASDAQ:UPST) is a financial company and an AI lending platform that partners with banks and credit unions to provide consumer loans using non-traditional variables, like education and employment, to predict creditworthiness. This allows it to offer loans to a broader range of borrowers, including those who may be underserved by traditional lenders.
The company has made significant AI model wins, revamped its funding supply, and increased operating efficiency. All of these factors together generated a revenue of $127.63 million in Q2. However, this revenue recorded a 5.99% year-over-year decline. Revenue from fees was down 9% due to higher pricing for prime loans.
However, loan transactions increased 31% year-over-year in Q2, reaching 144,000. New borrowers increased 21% sequentially. The average loan size decreased to $7,700 due to growth in small-dollar loans and again the higher pricing on prime loans.
It recently launched a major improvement to its credit pricing model. The new model, M18, incorporates the Annual Percentage Rate (APR) as a feature. M18 generates ~1 million predictions for each applicant, marking progress in AI-based modeling.
The company automated 91% of core unsecured loans, up from 73% two years ago. Automation is essential for cost efficiency and a better product. It’s expanding into auto loans, small-dollar relief loans, and home equity lines of credit.
Its HELOC product (Upstart’s Home Equity Line of Credit ), available in 30 states, covers 51% of the US population, with an instant approval rate of 42%, up from 36%, allowing applicants to avoid document uploads. HELOCs have zero defaults to date.
Upstart Holdings Inc. (NASDAQ:UPST) is focusing on core personal loan product, which offers significant growth potential. The product has improved significantly in recent years, with advancements in model accuracy, fraud detection, automation, funding resiliency, acquisition costs, and revenue optimization.
Here is what Vulcan Value Partners has to say about Upstart Holdings Inc. (NASDAQ:UPST) in its Q2 2022 investor letter:
“Upstart Holdings Inc. was a material detractor for the quarter. It was a mistake, and we sold our position. Upstart is an artificial intelligence (AI) and cloud-based lending platform. The company uses AI models that are designed to underwrite superior loans with lower interest rates, lower default rates, higher approval rates, and increased underwriting automation. When we purchased Upstart, we believed the company had an excellent product and the addressable market was large.
Upstart’s results during 2021 were impressive. In the first quarter of 2022, the company reported solid results but lowered guidance and, more importantly, used its balance sheet to warehouse loans temporarily. The company’s decision to use its balance sheet to finance its growth surprised us and other market participants, and its stock price decreased dramatically. While we admire the management team, we are less confident in the company’s long-term prospects.
It will be more difficult than we anticipated for Upstart to extend its competitive advantages with smaller banks into adjacent markets such as auto loans and mortgages. As a result, our value for Upstart is unstable and the company no longer qualifies for investment. We are following our discipline and reallocating capital into companies with more stable values.”
3. Consensus Cloud Solutions Inc. (NASDAQ:CCSI)
Number of Hedge Fund Holders: 18
Consensus Cloud Solutions Inc. (NASDAQ:CCSI) is the world’s largest digital fax provider and a trusted global source for the transformation, enhancement, and secure exchange of digital information. Its platform enables businesses to manage customer interactions through various channels, such as voice, chat, and email and uses AI to improve customer service experiences, automate tasks, and gain valuable insights from customer interactions.
Revenue made in the second quarter of 2024 was $87.50 million, with earnings per share of $1.45. Both of these financials beat Street expectations, but revenue declined by 5.70% year over year. The SoHos business revenue declined 15.6% year-over-year. The total number of SoHo accounts decreased from 808,000 to 785,000 during the quarter.
The e-commerce and SoHo upsell strategy remains effective, resulting in ~2,700 new customers in Q2. Advanced products accounted for 14% of new sales, consistent with the second half of 2023 but lower than Q1 performance.
EC Fax (cloud-based fax solution) is progressing well at the Department of Veterans Affairs. Management expects over $2 million in revenue from the program in 2024. The company is seeing increased demand for its solutions in both healthcare and state/local government.
The cloud fax solution is fully cloudified, and its AI offering, Clarity, is generating robust interest. Customers are intrigued by its ability to tailor models for specific use cases, which has led to increased proof-of-concept requests and is contributing to the growing implementation backlog.
The company has also repurchased $29.7 million of debt in Q2, bringing its total repurchases since November 2023 to $156 million and reducing the outstanding debt to $649 million. Strong demand for its cloud-based solutions and innovative AI offerings demonstrates significant market potential. With a solid customer acquisition strategy, Consensus Cloud Solutions Inc. (NASDAQ:CCSI) is expected to expand shortly.
Meridian Small Cap Growth Fund stated the following regarding Consensus Cloud Solutions, Inc. (NASDAQ:CCSI) in its first quarter 2024 investor letter:
“Consensus Cloud Solutions, Inc. (NASDAQ:CCSI), a leading supplier of both secure data delivery for enterprise healthcare interoperability and cloud fax solutions to small office home office (SoHo) customers, was spun out of longtime holding J2 Global (now Ziff Davis) in the fourth quarter of 2022. Consensus has historically enjoyed a high percentage of recurring revenues, low churn in the enterprise segment, and high margins. Much of the company’s current strategic focus is to build upon its legacy digital cloud fax service for the enterprise healthcare sector where data security and interoperability are key concerns. Despite an earnings report in line with expectations, the stock declined during the quarter on lower[1]than-expected guidance. The healthcare business continues to be under macro pressure, largely driven by IT staffing issues that are slowing enterprise-level adoptions of Consensus’ solutions. The company has rightly downshifted to a lower revenue reality and management is proactively shifting marketing spend from inefficient top-line growth efforts in its SoHo segment toward higher revenue generating customers in healthcare. We expect healthcare’s macro issues to eventually ease, resulting in revenue growth accelerating from the low single-digit growth today towards low double digits. The stock was recently trading at an attractive three times earning multiple with more than a 20% free cash flow yield. We believe that even modest growth from here and continued deleveraging could result in a materially higher share price. We maintained our position in the company during the quarter.”
2. iRobot Corp. (NASDAQ:IRBT)
Number of Hedge Fund Holders: 17
iRobot Corp. (NASDAQ:IRBT) is a technology company that designs and builds consumer robots, most notably a range of autonomous home vacuum cleaners (Roomba), floor moppers (Braava), and other autonomous cleaning devices. With more than 30 years of AI and advanced robotics experience, it uses AI to make its robots more intelligent and efficient, providing a better user experience.
In Q2 2024, the revenue declined 36% in the US, 35% in Japan, and 22% in EMEA, and D2C revenue represented 23% of total revenue. Despite challenges in this quarter, including a year-over-year revenue decline of 29.68% to $166.36 million, the company is improving its financial position.
Under new CEO Gary Cohen, the company has implemented a restructuring plan to reduce operating expenses and improve product margins. Workforce reductions and more efficient marketing strategies contributed to a 28% year-over-year decrease in operating expenses for Q2.
iRobot Corp. (NASDAQ:IRBT) announced the launch of the Roomba Combo 10 Max, its most advanced cleaning robot yet, in mid-July. This 2-in-1 robot vacuum and mop features a multi-function AutoWash Dock and is part of the company’s strategy to enhance its product lineup.
It also announced the creation of iRobot Labs, its innovation center. This global initiative aims to use internal talent and partnerships to reduce time to market and maintain technological leadership, with a commitment to reclaiming its position as the global innovation leader in consumer robots. The announcement also emphasized the growth potential in the functional cleaning devices market, particularly in Europe.
With upcoming product launches in 2025, the company is well-positioned to regain its leadership in the consumer electronics market, making it an attractive stock for long-term investors.
1. BigBear.ai Holdings Inc. (NYSE:BBAI)
Number of Hedge Fund Holders: 9
BigBear.ai Holdings Inc. (NYSE:BBAI) provides AI-powered, decision intelligence solutions for defense, manufacturing & warehouse operations, healthcare & life sciences, with a focus on national security, supply chain management, and digital identity & biometrics. The company aims to simplify AI adoption in edge networks by 2025, allowing customers to deploy AI closer to IoT devices.
One of the company’s major customers, Virgin Orbit, went bankrupt in 2023, limiting its revenue streams. This is a particularly concerning development since it heavily relies on just 3 customers (49% of 2023 revenue). These long-term contracts expire between 2024 and 2026, and renewal is uncertain. Revenue growth could slow if it doesn’t acquire new customers before then.
Through the acquisition of Pangiam earlier this year, the company enhanced its capabilities in computer vision and biometrics, particularly in sectors such as national security, supply chain management, and digital identity. Later, it partnered with Heathrow Airport to use AI for improved security and operational efficiency.
Additionally, BigBear.ai Holdings Inc. (NYSE:BBAI) secured a new $7.7 million contract with the US Army and extended another project for $8.5 million over six months, solidifying its position as a key prime contractor for the military. This strong performance caused a 35% stock price surge in August following a recent contract win with the Federal Aviation Administration (FAA).
The company made $39.78 million in revenue, up 3.44% year-over-year in Q2 2024. Yet, it has faced challenges in securing contracts recently. The company reported difficulties in its latest quarter, which has impacted its stock performance.
In July, BigBear.ai’s Troy™ achieved “Awardable” status, making it available for purchase through the CDAO’s Tradewinds Solutions. As one of its top products, Troy™ is poised to revolutionize cybersecurity. Overall, the company is well-positioned for growth as it integrates AI across its businesses, and remains dominant in defense. The target market is expected to triple by 2028 due to AI adoption.
As we acknowledge the growth potential of BigBear.ai Holdings Inc. (NYSE:BBAI), our conviction lies in the belief that AI stocks hold great promise for delivering high returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than BBAI but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: $30 Trillion Opportunity: 15 Best Humanoid Robot Stocks to Buy According to Morgan Stanley and Jim Cramer Says NVIDIA ‘Has Become A Wasteland’.
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