We recently compiled a list of the 20 Worst Performing AI Stocks of Last Week. In this article, we are going to take a look at where Arista Networks, Inc. (NYSE:ANET) stands against the other AI stocks.
US Stocks in September
This September saw a sluggish start for most US stocks, and large-cap technology stocks were no exception to this trend. The main driving factors for this development include concerns over the health of the American economy resurfacing, particularly in light of the August jobs report. The report underscored the labor market’s weakness in the US, which has not left investors feeling all that secure about the state of the economy.
On the stock side, many investor favorites in the artificial intelligence (AI) space have been doing poorly so far in September, with losses ranging from around 4% to even over 20% for the first week of September. The primary reason for this decline seems to be that investors are just not satisfied with the growth demonstrated by major AI companies at present. While growth is definitely present, it’s continuing to fall short of investor expectations, which have increased exponentially in light of the hype cycle created around AI stocks.
Are We Really In An AI Bubble?
The first week of September was actually the worst week for chip stocks recorded in over two years. Many investors are now beginning to wonder whether AI is worth the amount of money being poured into it, resulting in corporate spending on AI coming under greater scrutiny than ever before. The greater scrutiny is predominantly because of investors and analysts now thinking that many AI stocks are overhyped and overvalued and don’t have the means to justify this hype and valuation – essentially, the main concern is that we’re in an AI bubble that’s on the brink of bursting.
However, as with any high-tension market situation, there are diverging opinions as well. In his September 6 interview on CNBC’s “Closing Bell Overtime,” Deepwater Asset Management’s managing partner, Gene Munster, emphatically stated that we are not in an AI bubble. For him, the bigger problem in the AI space is that every other company today is trying to talk about AI and say that it’s working towards AI incorporation in its operations – something that’s leading to a lot of noise in the market, which is drowning out the voices of companies offering real substance in this space. He thus noted that it’s important for investors to be careful not to invest in just any company that says it’s working with AI and instead to focus on the better, perhaps more boring, options in the market.
According to Munster, the main players to keep your money in are predominantly big tech names, as these are the only companies that are poised to deliver substantial growth instead of just generating noise. However, investors are still confused about whether AI is a good place to invest in even today, which is why we’ve compiled a list of the worst performing AI stocks in September so far and explained whether these stocks are worth picking up or if they’re just temporary beneficiaries of the hype around AI.
Our Methodology
We compiled our list by screening for AI stocks that have seen declines of 10% or above in the first week of September, and then ranked the stocks based on their weekly decline as of Friday, September 6. We have also mentioned the number of hedge funds holding stakes in each stock.
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).
A technician in a server room managing a large-scale network of computers.
Arista Networks, Inc. (NYSE:ANET)
Weekly Decline: 10.96%
Number of Hedge Fund Holders: 65
Arista Networks, Inc. (NYSE:ANET) is an information technology company that offers data-driven client-to-cloud networking solutions for data center, campus, and routing environments. The company also provides the best IP/Ethernet-based solutions for AI/ML workloads.
In the second quarter, Arista Networks, Inc. (NYSE:ANET) delivered revenues of $1.69 billion, which represents a growth of 15.8% year-over-year, and also beat the first quarter’s revenue of $1.5 billion. This type of growth is quite typical for companies serving the AI market and the expansion in data centers like Arista Networks, Inc. (NYSE:ANET). This company’s products, particularly in the ethernet space, enable AI connectivity, which is essential for AI and tech companies.
According to several analysts, we are going to see upgrades worth $1 trillion to our existing data center infrastructure, so Arista Networks, Inc. (NYSE:ANET) is also poised to greatly benefit from this tailwind. The company’s management also completed repurchases of its common stock worth $2 billion in the first quarter and further authorized an additional program to repurchase up to $1.2 billion worth of shares.
Stock buybacks are generally a good indicator in terms of valuation because they indicate that company management feels that the stock is undervalued. It represents a certain confidence on the part of company management, highlighting that they are aware of the market and the value of their product offerings. Since Arista Networks, Inc. (NYSE:ANET) is offering both optimal networking for AI platforms and AI for networking outcomes, such confidence may be well-place. In light of this, the stock’s current negative performance should not discourage long-term investors from retaining or buying Arista Networks, Inc. (NYSE:ANET) shares.
A total of 65 hedge funds were long Arista Networks, Inc. (NYSE:ANET) in the second quarter, with a total stake value of $1.9 billion. Citadel Investment Group was the largest shareholder, holding 859,600 shares.
Overall ANET ranks 18th on our list of the worst performing AI stocks last week. While we acknowledge the potential of ANET as an investment, we believe that AI stocks hold 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 ANET but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.