It seems like anything related to artificial intelligence (AI) has turned to gold in the last year. There are now trillions of AI-related dollars in value driving the stock market higher as prices soar for anything deemed an AI winner. Most of the largest companies in the world are now related to or investing heavily in AI, meaning that future stock returns hinge on this fast-growing sector. So far, it is keeping up its end of the bargain with stock prices at all-time highs.
All this excitement has led some stocks to become greatly overvalued. Booms are almost always followed by busts, because the promise of a new technology leads people to get too optimistic about future growth, which eventually doesn't live up to the extreme expectations that accompany the boom. Here are two AI stocks to consider selling during this AI boom.
Palantir's extreme valuation
Maybe the hottest AI stock out there is Palantir Technologies (PLTR 1.27%). The AI software provider for the United States government and large corporations has a current market cap of $363 billion, making it the 24th-largest company in the world as I write this.
The business is growing quickly as its AI products get rapidly adopted. Revenue grew 39% year over year last quarter, driven by 55% revenue growth in the United States and 71% growth from U.S. commercial customers. Corporations are signing large deals with Palantir, with 139 deals worth at least $1 million closed just in the first quarter. It is a profitable software start-up, with a 20% operating income margin.
All this can be true and yet not matter for any investor considering buying the stock today. The thing is, Palantir only generated $3.1 billion in revenue in the trailing 12 months compared to a $363 billion market cap. That gives the stock a price-to-sales (P/S) ratio of 123, which is higher than any company of this size in history.
Let's run some numbers to show why this makes Palantir stock overvalued. Assuming Palantir grows its revenue at the recent 39% rate for the next five years, it would grow its revenue to $16 billion. Taking its current profit margin and expanding it to 30%, the company would be generating just under $5 billion in earnings in five years. Or, a price-to-earnings (P/E) ratio of 72.6. Even if Palantir keeps growing at this blistering rate for five more years, the stock would still trade at a highly expensive earnings ratio.
This means forward returns will be disappointing for Palantir shareholders. Now is a good time to consider selling your shares of this high-flying stock.
Image source: Getty Images.
BigBear.ai's slow growth
BigBear.ai (BBAI 2.04%) does not look overvalued at first glance, at least compared to Palantir. It has a P/S ratio of 13. If it can deploy its AI-powered, intelligence decision solutions across the United States, it may have a chance to grow much larger than its current market cap of $2.4 billion at an $8 share price.
The problem is the company's underlying growth rate. Revenue was only up 5% year over year last quarter to $35 million, even though there's an AI spending boom. BigBear.ai competes directly with Palantir and seems to be losing out to the much larger company. Profits keep eluding the company. It posted a $21 million operating loss last quarter on just $35 million in revenue. It keeps raising money through stock offerings, with shares outstanding up 100% since going public through a special purpose acquisition company (SPAC).
Management brags about deals with the Department of Defense, such as a recent contract to modernize the Joint Chiefs of Staff, but this is only a $13.4 million deal over 3.5 years. It is not going to move the needle for BigBear.ai's business anytime soon.
The stock may be soaring, but this is the exact wrong company to bet on during a technology boom. BigBear.ai's revenue is barely growing, it is losing out to the competition, and it is burning a lot of money. This is why you should consider selling BigBear.ai stock after its recent run-up. Just because it has AI in the name does not mean it is a good stock to buy.
