3 Overpriced Darlings Short Sellers are Salivating Over

U.S. equities markets continue on their jaw-dropping rally. The tech-heavy Nasdaq Composite has risen 22.6% since the start of the year, while the S&P 500 has hit a record, rising 18.1% on a year-to-date basis.  The rally is largely a continuation of what we had observed in 2023, a clear extension of the so-called “AI craze.” However, as we get further into the year cracks appear to be forming at the surface. AI-focused chipmaker Nvidia (NASDAQ:NVDA) had a brief moment of assuming the position as the world’s most valuable company, but shortly after, the company’s share price entered correction territory. This underscores some of the fragility in markets that is bubbling. As a result, many investors are seeking out short sellers.

Valuations and prices have already become stretched, and certain stocks that have benefitted from the AI hype or other market crazes could see their prices tank if their growth and earnings don’t pick up. This means it could be a great time for short sellers. Below are 3 overpriced darlings that could make hefty profits for short sellers.

SoundHound AI (SOUN)

The rise of SoundHound AI‘s (NASDAQ:SOUN) shares is a direct result of the aforementioned AI craze. Once Nvidia revealed it had invested into the conversational AI startup, SOUN shares soared. SoundHound AI’s stock price rose as much as 320.2% for the year by mid-March. However, investors piling into the company’s stock became sorely disappointed after short seller Capybara Research released a pretty damning report. The short seller alleged the company’s conversation AI product leveraged “commodity speech recognition.” In other words, SoundHound AI’s software isn’t particularly special, particularly when tech giants like Amazon and Alphabet have been developing in-house voice recognition technologies for years at this point.

SoundHound’s share price has still more than doubled on a year-to-date basis. What’s more is that the startup is far away from being profitable. Not to mention it trades at a frothy 20.4x forward sales. It’s no wonder SoundHound’s short interest sits at 21.4%.

NIO (NIO)

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NIO (NYSE:NIO) is a Chinese EV maker that has seen its shares struggle in recent months. The EV maker focuses on the upper-end segment of the market, and while that has created a somewhat sticky customer base, NIO is struggling with the intense competitive environment of China’s EV industry. In May and June, investors were elated to hear NIO delivered record numbers of electric vehicles. According to a press release, for the second quarter of 2024, NIO delivered 57,373 vehicles, which represented an increase of 143.9% year-over-year. Cumulative deliveries now stand at 537,020 as of June 30, 2024.

However, hiked tariffs from the European Union, an international market NIO had seen as key to its expansion plans, and a stretched valuation could see NIO’s share price continue to tank in the near term. NIO shares have plummeted nearly 50% on a year-to-date basis, yet short interest for NIO’s stock still sits at an elevated 9.1%.

Palantir (PLTR)

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Palantir (NYSE:PLTR) is another well-known software firm and benefactor the AI market craze. However, the data analytics firm has definitely come far from where it started. Instead of focusing solely developing software products for defense agencies and contractors, Palantir has moved on to servicing a variety of industries, and this has not only helped fuel its growth but also pushed the firm into GAAP net profit territory. Amidst last year’s hype around generative artificial intelligence technologies, Palantir decided to put together a new platform-AIP-that would layer large language models on top of the analytics software Palantir customers were already using.

Though this platform is still in its early testing phases, PLTR shares have rallied since then, causing its valuation to balloon. Palantir trades at 83.9x forward earnings, which is nearly twice that of Nvidia. The data analytics firm’s first quarter results already hinted that AIP isn’t boosting future revenue and earnings as much as analysts were hoping either.

Those who think PLTR’s current valuation is tenable in the long-term likely have a surprise coming. Short sellers haven’t caught on to this yet, given Palantir’s relatively low short interest, but they very well could as Wall Street continues to scrutinize trading multiples and earnings.

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.