We recently compiled a list of the 10 Worst AI Stocks to Buy According to Reddit. In this article, we will look at where Fastly Inc. (NYSE:FSLY) ranks among the worst AI stocks to buy.

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).

Fastly Inc. (NYSE:FSLY)

Short % of Shares Outstanding As of August 30: 10.31%

Number of Hedge Fund Holders: 23

Fastly Inc. (NYSE:FSLY) is a cloud computing services provider that describes its network as an edge cloud platform, designed to help developers extend their core cloud infrastructure to the edge of the network, closer to users.

In June, it launched Fastly AI Accelerator, its first AI solution designed to create a better experience for developers by improving performance and reducing costs across the use of similar prompts for LLM apps. Earlier, it released a Bot Origin Protection (BOP) mitigation solution which was well-received by customers, strengthening its security portfolio and opening up opportunities for cross-selling.

Analysts are concerned that its stock may decline due to slowing growth from its largest customers and potential market share loss in the delivery market. Fastly Inc. (NYSE:FSLY) has been facing pricing pressure in its delivery business. The expected weakness, mainly among the top 15 customers, is due to lower renewal rates without corresponding traffic increases. The absence of minimum commitments in contracts with these customers raises the risk of traffic being diverted to cheaper providers.

Despite these risks, the company made $132.37 million in Q2 revenue for this year, up 7.77% year-over-year. Top 10 customers made up 34% of the total revenues. Enterprise customer count increased by 4% sequentially and 50% year-over-year. Its channel partners, the intermediaries between the company and its end-users, grew deal registrations by 33%, and the channel’s revenue contribution more than doubled year-to-date.

The company is prioritizing customer acquisition, portfolio expansion, and innovative edge technologies. This is essential to achieve the aim of $1 billion in revenue in the next few years. Its modern CDN technology offers a competitive advantage over legacy competitors and is preferred by developers. Fastly Inc. (NYSE:FSLY) is actively restructuring to reduce costs and aims to achieve profitability by 2025.

Overall FSLY ranks 8th on our list of the worst AI stocks to buy. While we acknowledge the potential of FSLY as an investment, 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 FSLY 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 was originally published on Insider Monkey.