3 minute read
Fundamental Intelligence
from April 2023
Getting smart about these AI stocks begins with an understanding of the basics
By Michael Rechenthin
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Be smart picking stocks in the artificial intelligence sector by considering the fundamentals of 12 popular AI companies.
That’ll require reviewing market capitalization, implied volatility and price/ earnings (P/E) ratios.
Smaller companies—the ones with less than a few billion dollars in annual sales— carry the greatest risk. They lack brand or sector diversification, they have limited funding and they don’t have long lists of capabilities.
But small-capitalization AI stocks, such as SoundHound AI (SOUN), and BigBear.ai Holdings (BBAI), also offer the opportunity for the greatest appreciation of price.
It’s the old story of greater risk/greater reward.
Implied volatility might be a new phrase for non-options trades, but it’s calculated from the price of the stock options. The more “expensive” the insurance (options price), the greater its implied volatility.
Implied volatility is greater for smallercapitalization stocks, and that’s no coincidence. “They” are pricing the insurance (options price) higher because there’s a greater risk of movement.
Who are “they?” They’re the traders and investors using options to protect and speculate around the price of the stock. The more risk the investing and trading public believes the stock presents, the greater the cost of insurance for the stock.
Then there’s the price-to-earnings ratio (P/E ratio). It’s the most recent price divided by earnings per share. Many find it a useful tool for analyzing a company’s profitability, especially in comparison to its peers.
The P/E figure can fluctuate from quarter to quarter but does give a high-level indication of profitability, especially in comparison to similar companies and stocks.
P/E is a popular measure, but it does have some flaws. Companies can be quite selective when it comes to boosting earnings per share. For example, they can increase earnings by cutting costs, which is generally favorable, but it’s not the same as suggesting the company is doing better because of an increase in customers. Instead, though, the company is doing better by controlling costs.
Another way of “manipulating” P/E is by buying back shares. Less stock in the marketplace means a greater share of money per share. That makes for a larger number at the bottom of the formula. P/E ratio will therefore be a smaller number.
Four stocks have negative P/E ratios, signaling recent losses. One of the greatest ways to increase a stock price is by creating a profit—at least in the long run.
Exchanges have minimum requirements for being listed. They include having a market capitalization of a specific amount and having minimum share increments— generally around $5 a share.
If the stock goes beneath that level for too long, exchanges can have them removed. That’s not good for the stock.
This is risky territory right now for the smaller players. C3.ai (AI) has partnerships with Google, Amazon, Intel, Microsoft and Baker Hughes, among others. But the company has been bleeding cash and has never made a profit. For those reasons, potential buyers need to beware.
Right now, we’re attracted to the mostcapitalized players—Apple (AAPL), Microsoft (MSFT), Alphabet (GOOG), Amazon (AMZN) and NVIDIA (NVDA).
Michael Rechenthin, Ph.D. (aka “Dr. Data”), is head of research and development at tastylive