Artificial intelligence (AI) stocks have been hot buys this year, but not all of them make for good long-term investments. Just about every business is trying to get in on the hype and launching AI-powered products and services, which can make it difficult to determine what’s a good buy and what’s not.
There are a couple of particularly risky stocks that AI investors have been gravitating toward this year that you’re better off avoiding. Recursion Pharmaceuticals (RXRX 3.21%) and C3.ai (AI -2.96%) benefited from AI-related developments and news this year, but they have already started to give back some of those gains. And more losses could be on the way.
1. Recursion Pharmaceuticals
Biotech company Recursion Pharmaceuticals wasn’t on many investors’ radars for much of this year. But then came an announcement in July that changed all of that. News that tech giant Nvidia, which has become synonymous with AI hardware this year, was investing $50 million into Recursion was game-changing news for the healthcare stock.
Shares of Recursion took off following the announcement as the two companies also said they would be working together and collaborating on AI-enabled drug discovery.
But as the excitement surrounding AI has begun to abate, Recursion’s stock price has retreated. At one point this year, the shares were up by more than 100%, but now, they are back in negative territory for the year, down 4%. As a clinical-stage drugmaker with no approved products that it can rely on to generate revenue, Recursion is prone to be an incredibly volatile stock.
While a simple press release can move its share price sharply, that momentum may not last. The company has incurred $260 million in losses over the trailing 12 months on revenue (mainly due to collaborations) of less than $50 million. It’s far too early to consider this an investable stock for the majority of investors.
Recursion has lofty goals of changing the world of drug discovery, but it still has yet to prove itself. Until and unless that happens, investors should avoid the stock, as the risk remains far too high.
C3.ai is a much more obvious AI investment — the company’s entire focus is on AI. Even though the stock has been struggling of late, it’s still up by more than 120% since the start of the year. But the issue here is that investors may be expecting too much as management has been hyping up C3.ai’s growth opportunities.
Unfortunately, its results haven’t been impressive by any stretch. The company released its fiscal 2024 first-quarter results last month, and revenue of $72.4 million for the period (which ended July 31) was only up 11% year over year.
CEO Thomas Siebel says C3.ai is “experiencing strong traction with our enterprise AI applications and especially C3 generative AI.” But despite that, the company hasn’t been generating significant growth, nor is it expecting a big boost next quarter. Its guidance calls for revenue of $72 million to $76.5 million. That’s hardly the type of growth investors might expect from a company involved so deeply in AI.
What’s also concerning is that the company is pushing back its timeline for achieving positive adjusted earnings — a goal it had previously set for the fiscal fourth quarter — as it will be investing more money into marketing efforts, including lead generation. That’s worrisome because if the company was developing strong AI solutions for companies, businesses should be coming to C3.ai amid all the excitement over AI, and C3.ai wouldn’t need to invest heavily in marketing to find and close those deals. It’s a red flag that investors shouldn’t ignore.
C3.ai no longer appears to be the hot buy it looked like earlier this year. Although it hasn’t given back all of its 2023 gains, it wouldn’t be surprising to see this stock fall further in value in the weeks and months ahead.
David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool recommends C3.ai. The Motley Fool has a disclosure policy.