As the artificial intelligence (AI) sector continues to captivate the market’s imagination, many AI stocks have seen their valuations skyrocket. However, certain AI companies have not demonstrated the operational strength or financial stability to justify their lofty market prices. With potential overvaluation coupled with operational inefficiencies, some AI stocks are poised for a correction.
Investors, excited by the transformative promises of AI, might have overlooked some fundamentals. Discrepancies in earnings reports, questionable growth strategies or unsustainable cash burns need a second glance. As the market begins to differentiate between genuine innovators and mere hype, July might present a turning point of weaker AI players facing significant declines.
Identifying and steering clear of these stocks could be crucial for protecting investment portfolios from upcoming volatility. In this context, let’s explore three AI stocks that investors might consider offloading from their portfolios in July to avoid potential downturns.
Palantir (PLTR)
Palantir (NYSE:PLTR) is known for its specialized data analytics platforms, Gotham and Foundry. Despite its innovative approach to data integration and analysis, Palantir’s financial performance and market strategy raise concerns among investors and analysts alike.
The company’s stock has seen a decline over the past year. Concerns primarily stem from its heavy reliance on government contracts, which, while lucrative, pose risks related to political and budgetary fluctuations.
Palantir reported a revenue increase of 21% year-over-year (YOY) in its latest quarterly results, indicating some level of growth. However, this growth rate pales in comparison to the explosive trajectories seen in earlier years, suggesting a potential slowdown in its market expansion.
The company’s aggressive sales and marketing strategies, alongside substantial R&D spending, continue to weigh on its profitability. For the last quarter, R&D expenses accounted for approximately 17% of the revenue. This highlights the company’s continued investment in innovation but also underscoring the high costs associated with such efforts.
Finally, the current market valuation of Palantir, with a forward P/E ratio significantly higher than the industry average, also makes it a less attractive option for investors.
UiPath (PATH)
UiPath (NYSE:PATH) is a leader in the robotic process automation industry. However, the company has faced a steep decline in its market valuation following the company’s disappointing fiscal outlook for 2025.
The core of UiPath’s product offering lies in its software that automates mundane tasks such as data entry through digital ‘bots.’ Despite the initial appeal and strong market positioning, recent developments have introduced an unsettling level of uncertainty. The departure of its key executive Rob Enslin has only compounded these concerns, signaling potential instability at a time when steady leadership is crucial.
UiPath’s latest earnings report unveiled a stark revision of its future financial expectations. The company had previously painted a robust picture of growth and innovation. Yet now, it anticipates a notable contraction in its operating profits. That shift starkly contrasts with earlier projections of steady profit increases.
Moreover, UiPath has reported difficulties in contract negotiations, particularly in securing multi-year commitments, which are critical for sustaining long-term revenue growth. This challenge is exacerbated by an increasingly cautious spending environment. Simply put, clients are hesitant to commit to large-scale investments.
SoundHound (SOUN)
SoundHound (NASDAQ:SOUN) faces substantial market challenges that call into question its financial sustainability and long-term growth prospects.
The company specializes in developing advanced voice AI technologies that enable seamless interactions between users and devices. Despite the allure of its products, SoundHound AI grapples with intense competition. Tech giants like Amazon (NASDAQ:AMZN), Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) and Apple (NASDAQ:AAPL), whose voice assistants—Alexa, Google Assistant, and Siri—dominate the market. These competitors not only have deeper financial resources but also vast consumer data to refine and enhance their AI capabilities.
SoundHound AI’s financial journey offers a mixed picture. On one hand, the company has demonstrated impressive revenue growth, with a reported 73% YOY increase in its latest quarterly earnings. However, this growth comes from a relatively small base, with total revenue still under $100 million annually. This underscores the scale challenge SoundHound faces against its larger competitors.
Moreover, due to significant cash burn, the company has continued to raise capital through stock offerings, leading to the dilution of existing shareholders, a critical issue for investor confidence.
On the date of publication, Mohammed Saqib 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.