Stocks to buy

AI Stock Short Squeeze Coming? Why Is a Buy Regardless

Since the height of mania over artificial intelligence stocks during March, shares in (NYSE:AI) have pulled back, and are currently in a slump. Not only that, plenty of market participants have made big wagers against AI stock.

According to Fintel, 32.1% of AI’s outstanding shares have been sold short. With this high level of short interest, some traders speculate that a short squeeze may be just around the corner. With this, they are holding onto positions, hoping another breakout takes shape in the near-term.

But while a short squeeze is within the realm of possibility, I wouldn’t base a decision to buy the stock on this factor alone. Still, don’t assume that means you should stay away from the stock completely.

Much like I have argued before, there’s enormous potential here, if you approach the right way.

AI $22.83

A Caveat for Any Short Squeeze Wagers

I can see why you may want to buy as a short-term short squeeze trade. The company’s next quarterly earnings release (expected to drop in early June) could spark a big spike for shares, if results beat expectations, and/or management provides strong updates to guidance.

There is, however, a caveat for making such a wager. Ahead of earnings, AI stock could continue to move lower, minimizing the potential upside.

Outside of the upcoming earnings report, it’s hard to find another potential event that could drive renewed bullishness for shares. Meanwhile, any negative development could be more than enough to send the stock tumbling again.

Remember back in early April, when short-seller Kerrisdale Capital made serious allegations about the company? While I believed these allegations didn’t change the bull case, Kerrisdale’s “short report” managed to scare more fair-weathered friends of this stock to sell.

A similar situation played out later in the month. An analyst downgrade from Wolfe Research wound up being enough to cause a double-digit decline for shares on April 24. If there’s another highly publicized negative take on the stock, investors could panic once again.

The Better Approach

Instead of buying AI stock today at just over $19 per share, only to see the stock potentially slide to the mid-teens ahead of earnings, and bounce back only to pre-slide price levels post-earnings, consider what I call the “better approach.”

As I have laid out in prior coverage, slowly accumulate a position in, pouncing on any weakness, but resist the urge to take profit when enthusiasm briefly sends shares parabolic.

While this approach requires patience and some fortitude, the potential payoff may be far more significant than merely the small/moderate fast profits gained from a short-squeeze bet.

Although AI shares have climbed significantly since the start of 2023, it’s important to remember this stock trades well below its 2020 IPO price of $42 per share. In hindsight, it’s clear investors overestimated how quickly this company would benefit from the rise of AI.

However, with now capitalizing on recent generative AI trends, the company may just well live up to the high expectations set by CEO Thomas Siebel in the last quarterly earnings release. Doing so could lead to a sharp, sustained move higher for shares.

The Takeaway

Not only does AI trade at less than 50% of its IPO price. Remember that shares at one point in late 2020/early 2021 were at triple-digit price levels.

That’s not to say that will come anywhere close to re-hitting such lofty levels. After all, shares hit these levels during the height of “meme stock mania.”

Still, an eventual more-than-doubling of price from where shares change hands today isn’t out of the question. In short, if you have the choice of making a longer-term investment, or a short-term trade in this stock, go with the former.

From a risk/return perspective, focusing a wager on AI stock on the prospect of improved fundamentals is a much better bet than one built around a massive squeeze that may fail to outweigh pre-squeeze declines, or worse, fail to arise at all.

AI stock earns a B rating in Portfolio Grader.

On the date of publication, Louis Navellier did not have (either directly or indirectly) any other positions in the securities mentioned in this article.

The InvestorPlace Research Staff member primarily responsible for this article did not hold (either directly or indirectly) any positions in the securities mentioned in this article.