Knowing the dynamics of AI stocks is increasingly crucial as the technology continues to integrate across industries. As the market enters July, evaluating AI-focused companies’ performance and potential pitfalls becomes paramount. Here are three companies grappling with distinct challenges amidst their AI-driven strategies. The weakening fundamentals may lead to a massive downfall in their market valuations.
The first company renowned for its enterprise AI solutions faces a pivotal shift from traditional licenses to subscription models, impacting revenue stability. Meanwhile, the second company navigates a dual landscape of declining legacy software revenues and substantial investments in Bitcoin. It has less opportunity and higher risk in digital asset integration. The third company specializes in unmanned systems bolstered by government contracts. It confronts revenue uncertainties tied to bureaucratic budget cycles and escalating research costs.
Whether considering strategic shifts, technological dependencies or market volatility, understanding these companies’ fundamentals is essential to evaluating these AI stocks to sell.
Pegasystems (PEGA)
Pegasystems (NASDAQ:PEGA) specializes in enterprise software that integrates AI decisions and automation. One critical weakness in Pegasystems’ financials is the decline in term license revenue projected for 2024. Term license revenue will likely constitute less than 25% of revenue in Q1 2024, along with a back-end-loaded distribution throughout the year. This trend underscores Pegasystems’ strategic shift towards subscription-based models.
However, while enhancing revenue predictability, they introduce variability in cash flow timing. Moreover, relying on Pega Cloud as a significant revenue driver leaves the company vulnerable to competitive pressures or market disruptions in the cloud segment.
Financially, Pegasystems reported a 9% annual contract value (ACV) increase in Q1. However, this growth rate, while positive, must be viewed in the context of a challenging comparison with powerful ACV additions in Q1 2023. The competitive state suggests sustaining such growth rates could be difficult in subsequent quarters. Additionally, while the company achieved a record free cash flow of $180 million in Q1, driven by ACV growth and cost management initiatives, the sustainability of this performance in less favorable quarters remains to be determined.
Pegasystems’ dropping recurring revenue and slowing ACV growth solidifies its mark on AI stocks to sell.
MicroStrategy (MSTR)
MicroStrategy (NASDAQ:MSTR) provides business intelligence software. The company’s rapid growth potential lies in its declining traditional software business revenues, particularly from on-premises product licenses. Throughout Q1 2024, MicroStrategy experienced a sharp 26% annual decline in on-premises product license revenues, amounting to $12.9 million. This decline is part of a broader strategic shift towards cloud-based offerings. This reflects ongoing challenges in migrating existing customers from perpetual licenses to subscription-based cloud services.
Moreover, MicroStrategy’s financial results highlight a dependency on Bitcoin (BTC-USD) related activities for substantial value creation. The company’s strategy of accumulating Bitcoin through debt financing and equity raises, totaling $7.54 billion for 214,400 Bitcoins. It significantly focuses on risky digital assets as a primary treasury reserve. Hence, his reliance on Bitcoin as a strategic asset presents risks, especially considering the volatility, pricing and regulatory uncertainties surrounding cryptocurrencies. MicroStrategy has realized substantial gains from Bitcoin appreciation, such as the $1.8 billion incremental value in Q1 2024. Finally, these gains also show that the company is similarly vulnerable to downturns, such as the drop in Bitcoin price in Q2.
In summary, MicroStrategy’s heavy reliance on Bitcoin holdings for value generation makes it a solid choice among AI stocks to sell.
AeroVironment (AVAV)
AeroVironment (NASDAQ:AVAV) designs and manufactures unmanned aircraft systems (UAS) and electric vehicle charging solutions. The company heavily relies on government contracts. This is particularly true of the US Department of Defense (DoD). This dependency is reflected in the revenue breakdown. Much of their revenue comes from products like the Switchblade and Puma systems. They are primarily sold to the military and defense sectors. The delays in US government budget authorizations have negatively impacted their MacCready Works segment, leading to a decrease in revenue. For instance, the delays in HAPS SoftBank revenue and U.S. DoD funding due to continuing resolutions have affected several programs.
MacCready Works segment revenue was down in Q4 by 9% annually. These declines are attributed to delays in funding and budget approvals. Moreover, AeroVironment faces challenges related to high operational costs and investments in research. Its research expenditure increased drastically. This can strain profitability in the short term. Research expenses for Q4 were $35 million (18% of revenue), up from $16 million (9% of revenue) in Q4 2023.
To conclude, AeroVironment’s revenue dependence on government contracts and high operational costs make it one of the top AI stocks to sell.
On the date of publication, Yiannis Zourmpanos 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.