3 Hype-Driven Stocks Destined for a Dramatic Fall
U.S. equities have continued their incredible rally in 2024.
Last year, despite major swings in performance, Nasdaq and the S&P 500 soared 43.2% and 24.2%, respectively. In 2024, excitement around artificial intelligence (AI) and recent economic data pointing to slowing inflation and a cooling job market have lifted the indices 22.6% and 16.8% for the year.
So, can that rally can sustain itself? AI-focused chipmaker Nvidia (NASDAQ:NVDA) has provided much of the index gains this year. But, investors are starting to worry if valuations have become too stretched. A few days ago, a boutique TMT stock research firm called New Street Research downgraded Nvidia from buy to neutral, citing valuation concerns.
Froth in the market should be worrisome to all investors because, while Nvidia investors have many concrete reasons to be optimistic, not every tech stock that has rallied recently has the same prospects. Let’s examine three hype-driven stocks to avoid or sell before they fall.
SoundHound AI (SOUN)
SoundHound AI (NASDAQ:SOUN) is a stock that received a ton of hype in the beginning of the year. In fact, shares soared as much as 320.3%, after Nvidia revealed it had invested into the startup.
The market frenzy around SOUN shares has thankfully come down due to a sobering short seller report from Capybara Research. While not every claim in a short report should be taken as pure gospel, the research firm did share some interesting points for investors.
For example, the short seller alleged SOUN’s AI-enabled voice product was not made via a great stride of proprietary research and development. Rather, the company’s software is not very different from voice AI assistants seen from Amazon (NASDAQ:AMZN), Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) and Apple (NASDAQ:AAPL).
SoundHound AI’s recent Q1 earnings report for 2024 revealed solid revenue growth. But, it’s still not enough to justify the company’s lofty valuation. And SoundHound AI’s road to profitability is still very much in doubt. While the stock has nearly doubled since the start of the year, it’s a far cry from its spot in mid-March and has only trended downward since then.
Palantir (PLTR)
Palantir (NYSE:PLTR) is another stock that is probably receiving too much hype than deserved. The data analytics firm has made a name for itself in recent years. Not only has the firm reached GAAP profitability, but also it is trying to gain exposure to the recent AI craze that has taken over the U.S. equities market.
In fact, Palantir’s AI Platform will layer large language models into its customers’ data workloads. So, clients can use the firm’s Gotham product, meant for defense contractors and governments. Or, they can use the Foundry product, which Palantir designed for enterprises across various industries.
Also, Palantir’s foray into AI products boosted its share price significantly from the start of the year until early May. Investors had been expecting a strong guidance read during Palantir’s Q1 earnings report release. However, the guidance it did receive was ultimately lackluster, leading to temporary downward momentum in Palantir shares. Nowadays,, PLTR share price is back in rally mode. Yet, without tangible AI growth in the coming earning season, the data analytics firm’s stock is likely to plummet.
Tesla (TSLA)
Tesla (NASDAQ:TSLA) is the final example on this list of a stock that’s receiving quite a bit unwarranted hype lately. The electric vehicle (EV) maker’s shares have spent most of the year underwater.
In particular, TSLA plummeted as much as 42.9% due to an EV market slump as well as intense competition coming from China’s EV champion BYD Company (OTCMKTS:BYDDY). Tesla’s first quarter results showed that the EV maker delivered 386,810 vehicles. It was the first year-over-year (YOY) decline since the pandemic years. Also, deliveries fell 14% short of analyst estimates.
However, because Tesla’s Q2 deliveries didn’t decline as much as analysts expected, the stock has rallied significantly. For the quarter, Tesla produced 410,831 vehicles, 14% lower than a year ago. Additionally, deliveries declined 4.8% YOY to 443,956, though increasing sequentially from the first quarter.
The market is excited about not receiving the worst-case scenario. However, let’s not fool ourselves into thinking the American EV maker is out of the woods. Tesla has committed to discounts and other incentives to spur delivery growth but has yet to do it. Also, the company still has no decent roadmap to making affordable EV models, which will be the biggest growth lever in the space going forward.
On the date of publication, Tyrik Torres did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.
