If you were starting to think the artificial intelligence (AI) mega trend was losing its luster, then think again:
The chart above shows the number of sentences where AI was mentioned in quarterly earnings reports through Q1 2024.
As you can see, the average earnings call now involves at least two mentions of AI on average.
Since ChatGPT was first launched (the dotted red line above), investor interest in AI has skyrocketed.
So executives across the board are now eager to mention their latest AI initiatives, whether they’re developing cutting-edge software or just upgrading their factory automation. As we can see in the chart, AI is now a hotter topic than ever for the financial “Masters of the Universe.”
The biggest winners of this emerging mega trend have so far been those tech stocks directly connected to developing AI hardware and software, including:
- Nvidia Corp. (NVDA) — +145%.
- Alphabet Inc. (GOOGL) — +31%.
- Meta Platforms (META) — +33%.
- Advanced Micro Devices (AMD) — +15%.
- Meanwhile, the returns of the S&P 500 were around 18%.
But with the biggest gains for “Magnificent Seven” tech stocks are now in the rearview, a new generation of AI stocks is set to take over…
AI’s “Left Behind” Stocks Now on the Launchpad?
The stock I’m going to tell you about today is one I first covered in July 2023 and have been following closely ever since.
In that first article, I explained how Big Tech companies like Microsoft Corp. (Nasdaq: MSFT) and Google parent Alphabet Inc. (Nasdaq: GOOGL) were pumping billions into AI and creating huge opportunities in the market:
Estimates suggest the global AI market size will go from $227.5 billion this year to $1.5 trillion by 2030 — a 599% jump in six years.
At the time, I suggested not taking out a second mortgage on your home to pour into AI stocks.
The reason is that, like cryptocurrencies or any other emerging technology, there will inevitably be far more losers than winners over the long-term.
I used Adam’s Green Zone Power Ratings system and found one AI-related stock that was underperforming.
Interestingly enough, that stock is still underperforming (but likely not for much longer).
This AI Stock Can’t Break Through
The stock I found was Upstart Holdings Inc. (Nasdaq: UPST).
Upstart uses a cloud-based AI platform to match consumers looking for loans with banks.
It uses AI models to reduce lending risk by factoring in 1,500 different variables, ranging from credit experience to bank account transactions.
When I wrote my initial article, UPST earned a “High-Risk” 2 out of 100 rating on Adam’s system… meaning it would significantly underperform the market over the next 12 months.
Since my essay, UPST’s performance has been nearly flat compared to the S&P 500’s 30% rise. In fact, the broader index has more than doubled the return of UPST over that time.
Its current rating isn’t that great either:
UPST rates are in red for five of the six factors that make up the Green Zone Power Ratings system.
Its 91 on Momentum should be looked at with caution, considering its fundamental ratings don’t support a sustained uptrend.
On Value, UPST doesn’t register a positive price-to-earnings or price-to-cash flow ratio. While Upstart has a strong gross margin, its net and operating margins are both in the red.
The company has a one-year sales growth rate of -39% and an earnings growth rate of -118%.
None of those numbers spell good news for the immediate future of UPST.
So, while AI continues to be a hot topic in the market, it’s important to understand that not all stocks in the space are poised to be winners.
This is one reason why it’s important to use Adam’s Green Zone Power Ratings system to weed out stocks in strong sectors that don’t quite pass muster as potential investments.
Until next time…
Safe trading,
Matt Clark, CMSA®
Chief Research Analyst, Money & Markets