Beware! 3 Machine Learning Stocks Waving Massive Red Flags Right Now
Though artificial intelligence and machine learning have gotten their fair share of hype this year, not all of these companies are positioned to outperform in 2023. This has led to the rise of machine learning stocks to avoid.
For those who don’t know, machine learning happens to be a branch of artificial intelligence that enables computers to learn from data and experience without being explicitly programmed. ML companies either employ machine learning techniques to create a product or develop useful machine learning tools that can provide other businesses with actionable data insights. Unfortunately, as the economic outlook remains as foggy as ever, there are some ML stocks suffering from declining revenue growth while others are trading at obscenely high valuations.
Below are three machine learning stocks that are waving some massive red flags.
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HashiCorp (HCM)
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Demand for cloud and cloud infrastructure solutions, in part spurred by enterprises migrating their data to cloud servers, has led to the steady rise of HashiCorp (NASDAQ:HCP). This software company, in particular, provides solutions to automate the processes critical in delivering applications on the cloud, including infrastructure provisioning, security, networking, and application deployment. Since the advent of the COVID-19 pandemic, HashiCorp has maintained a relatively high revenue growth rate, growing revenues at an average of 58.2% since 2020.
However, HashiCorp’s shares are trading down 8.2% YTD, despite delivering solid first and second-quarter earnings beats. The reason is likely due to HashiCorp’s less-than-stellar guidance. At best, management expects to grow revenue to $575 million in their fiscal year 2024, which would only imply 21.0% YoY growth, far below the average of the past few years.
The macroeconomic environment has also made acquiring new customers harder, thus making HashiCorp’s shares difficult to recommend for now. This is why it’s one of those machine learning stocks to avoid.
iRobot Corporation (IRBT)
Source: Sittipong Phokawattana / Shutterstock
iRobot Corporation (NASDAQ:IRBT) is a consumer robotics firm that employs machine learning and artificial intelligence to operate its popular products such as the Roomba vacuum cleaner and the Braava mop. The company had been benefiting from the increased demand for smart home devices and the shift to e-commerce during the pandemic. Despite having a brief period of elevated YoY top-line growth, revenues plummeted 24.4% in 2022 and have continued their downward trend in 2023.
iRobot’s revenue declined 45.1% YoY in the first quarter of 2023 and suffered a further YoY decline of 7.3% in the second quarter. The reason for the falling growth is most likely due to inflation and the toll it has had on consumers. Enterprises focused on selling discretionary products to consumers have had a tough year as ordinary people pull back spending. Consumer electronics – smartphones, tablets, TVs, and PCs – have been some of the most impacted products.
iRobot shares have fallen 27.1% since the start of the year, and until consumer demand and confidence improve, investors should avoid this stock.
Twilio (TWLO)
Source: Sergio Photone / Shutterstock.com
Twilio (NYSE:TWLO) is a cloud communications platform that enables developers to build voice, video, messaging, and email applications using its APIs. The cloud communications company uses ML in a variety of applications, including to help identify and filter out spam messages as well as to transcribe voice messages. However, business performance has been mixed this year. After reporting that revenue growth decelerated to 34.6% YoY growth in 2022, below the 60+% top-line growth figures of the prior years, Twilio beat earnings estimates for its first quarter results in 2023. Unluckily, Twilio issued weak guidance for the following quarter. If this story sounds familiar, that’s because lower-than-expected guidance, caused by a difficult selling environment, has hammered a number of stocks this year.
Though Twilio’s shares have risen 28.1% since the start of 2023, the stock could be in for some more turbulence as investors increasingly become skeptical of lofty tech sector valuations. Twilio’s shares trade at 36.9x its projected earnings, which could make it susceptible to a potential devaluation in the near term. Investors should beware or, at the very least, proceed with caution.
On the date of publication, Tyrik Torres did not have (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.
Tyrik Torres has been studying and participating in financial markets since he was in college, and he has particular passion for helping people understand complex systems. His areas of expertise are semiconductor and enterprise software equities. He has work experience in both investing (public and private markets) and investment banking.
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