We recently compiled a list of the 10 Worst Artificial Intelligence (AI) Stocks To Buy According to Financial Media. In this article, we are going to take a look at where Consensus Cloud Solutions Inc. (NASDAQ:CCSI) stands against the other AI stocks.
Is a 0.5% Rate Cut Aggressive?
Analysts have long predicted interest rate cuts and the Fed just lowered rates by 0.5% on September 18th. This is the first rate cut since the pandemic, driven by concerns about the labor market, and was followed by market volatility. The new benchmark rate is between 4.75% and 5.0%, with more cuts expected. Fed Chairman Jerome Powell stated that these cuts are based on economic data, not political factors.
We have had several analysts supporting or opposing the 50 basis-point rate cut, both before and after the announcement was finally made. We recently discussed the President at Potomac Wealth Advisors, Mark Avallone’s, stance on this aggressive decision made by the Fed. Here’s an excerpt from our article on the 10 Worst Small Cap AI Stocks To Buy According to Short Sellers, that covered his opinion:
“Mark Avallone expressed surprise at the Fed’s decision but emphasized that investors shouldn’t make impulsive decisions, but rather utilize potential opportunities in small and mid-cap stocks, which he believes will benefit from a lower interest rate environment…. Avallone warned investors to be cautious with traditional banks, especially mid-sized and large ones, based on his experience at Bank of America. He believes that the recent changes in loan pricing after the Fed’s rate cut would hurt banks’ overall revenue and income from interest…. He suggested that it may be too late for significant moves in fixed-income investments, as many investors have already lengthened their bond durations. He recommended pausing further adjustments until it’s clear whether the rate cut is due to an economic slowdown or a preemptive action.”
After announcing that the Central Bank has lowered interest rates by half a point, Fed Chair Jerome Powell took questions from reporters regarding this first-ever cut decision since 2020. He emphasized their commitment to timely monetary policy adjustments, particularly in light of the current economic landscape. The Fed believes they aren’t behind the curve, and the decision to cut rates reflects a strong commitment to avoid falling behind.
In response to a question about whether the rate cut was influenced by recent employment data or the high nominal level of the federal funds rate, he clarified that their policy position was established in July 2023, a period characterized by high inflation and low unemployment. He highlighted their patience in reducing the policy rate, noting that other central banks had already implemented multiple cuts while the Fed had refrained from such actions until now. This patience has reportedly paid off, as there is now greater confidence that inflation is trending sustainably toward the 2% target.
Powell indicated that the recent rate cut should not be interpreted as a new pace for future adjustments but rather as part of a recalibration of policy toward a more neutral level. He referred to the Summary of Economic Projections (S.E.P.) as a guide for understanding potential future cuts, emphasizing that economic developments could lead to adjustments in either direction.
When asked about implications for balance sheet policy following this larger rate cut, he noted that reserves within the banking system remain stable and abundant. He clarified that there are no plans to halt balance sheet runoff as a result of this decision, indicating that both monetary policy easing and balance sheet management can occur concurrently.
With a lower interest rate environment, investors everywhere are looking to either make a decision about their current AI stock holdings or diversify their portfolios with a higher ratio of AI stocks. But how has the September cut really impacted the AI sector? The Futurum Group Chief Market Strategist, Cory Johnson, just discussed what Fed rates mean for the tech sector as they invest more into artificial intelligence.
The recent decision by the Fed to lower interest rates has initiated a ripple effect in the tech sector, which can lead to increased tech spending and potentially larger venture capital investments. Corey Johnson noted that the current environment is favorable for tech stocks.
Johnson pointed out that there had been a reset in tech stocks when the Fed was not pivoting as quickly as investors would have liked. However, with the recent cut, there seems to be a renewed coupling between tech stocks and market sentiment. Even a reduction of 50 basis points can ease borrowing and spending, leading to increased M&A activity. He said this trend will likely result in heightened investments in technology, particularly AI.
He also highlighted how lower interest rates could accelerate the shift towards AI computing by making capital more accessible for companies looking to invest in this area. Johnson mentioned that as rates decrease, expected returns on investments look more attractive, especially in growth sectors like tech. This shift could lead to greater confidence among companies to invest in AI.
As for venture capital, Johnson noted that there is significant activity in the Bay Area, particularly with semiconductor startups. He observed that many new projects have been announced recently, indicating a robust interest in this sector. Interestingly, he pointed out that securing funding often happens before a product is fully developed so investors are increasingly focused on assembling the right teams rather than just having a finished product.
Overall, Johnson’s insights reflect a positive outlook for tech spending and venture capital investment in light of the Fed’s rate cuts, particularly within the AI and semiconductor sectors. As companies adapt to changing financial conditions, Powell’s discussion of the Fed’s strategic approach presents investors with both opportunities and challenges. We’re here to help you navigate the situation better with a list of the 10 worst artificial intelligence (AI) stocks to buy according to financial media.
Methodology
To compile our list, we sifted through rankings of AI stocks on different financial media websites to compile a list of 20 possible AI stocks. We then selected the 10 stocks that were the least popular among elite hedge funds and that analysts were bearish on. The stocks are ranked in descending order of the number of hedge funds that have stakes in them, as of Q2 2024.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A businesswoman signing an online document using a cloud-faxing solution.
Consensus Cloud Solutions Inc. (NASDAQ:CCSI)
Number of Hedge Fund Holders: 18
Consensus Cloud Solutions Inc. (NASDAQ:CCSI) is the world’s largest digital fax provider and a trusted global source for the transformation, enhancement, and secure exchange of digital information. Its platform enables businesses to manage customer interactions through various channels, such as voice, chat, and email and uses AI to improve customer service experiences, automate tasks, and gain valuable insights from customer interactions.
Revenue made in the second quarter of 2024 was $87.50 million, with earnings per share of $1.45. Both of these financials beat Street expectations, but revenue declined by 5.70% year over year. The SoHos business revenue declined 15.6% year-over-year. The total number of SoHo accounts decreased from 808,000 to 785,000 during the quarter.
The e-commerce and SoHo upsell strategy remains effective, resulting in ~2,700 new customers in Q2. Advanced products accounted for 14% of new sales, consistent with the second half of 2023 but lower than Q1 performance.
EC Fax (cloud-based fax solution) is progressing well at the Department of Veterans Affairs. Management expects over $2 million in revenue from the program in 2024. The company is seeing increased demand for its solutions in both healthcare and state/local government.
The cloud fax solution is fully cloudified, and its AI offering, Clarity, is generating robust interest. Customers are intrigued by its ability to tailor models for specific use cases, which has led to increased proof-of-concept requests and is contributing to the growing implementation backlog.
The company has also repurchased $29.7 million of debt in Q2, bringing its total repurchases since November 2023 to $156 million and reducing the outstanding debt to $649 million. Strong demand for its cloud-based solutions and innovative AI offerings demonstrates significant market potential. With a solid customer acquisition strategy, Consensus Cloud Solutions Inc. (NASDAQ:CCSI) is expected to expand shortly.
Meridian Small Cap Growth Fund stated the following regarding Consensus Cloud Solutions, Inc. (NASDAQ:CCSI) in its first quarter 2024 investor letter:
“Consensus Cloud Solutions, Inc. (NASDAQ:CCSI), a leading supplier of both secure data delivery for enterprise healthcare interoperability and cloud fax solutions to small office home office (SoHo) customers, was spun out of longtime holding J2 Global (now Ziff Davis) in the fourth quarter of 2022. Consensus has historically enjoyed a high percentage of recurring revenues, low churn in the enterprise segment, and high margins. Much of the company’s current strategic focus is to build upon its legacy digital cloud fax service for the enterprise healthcare sector where data security and interoperability are key concerns. Despite an earnings report in line with expectations, the stock declined during the quarter on lower[1]than-expected guidance. The healthcare business continues to be under macro pressure, largely driven by IT staffing issues that are slowing enterprise-level adoptions of Consensus’ solutions. The company has rightly downshifted to a lower revenue reality and management is proactively shifting marketing spend from inefficient top-line growth efforts in its SoHo segment toward higher revenue generating customers in healthcare. We expect healthcare’s macro issues to eventually ease, resulting in revenue growth accelerating from the low single-digit growth today towards low double digits. The stock was recently trading at an attractive three times earning multiple with more than a 20% free cash flow yield. We believe that even modest growth from here and continued deleveraging could result in a materially higher share price. We maintained our position in the company during the quarter.”
Overall CCSI ranks 3rd on our list of the worst AI stocks to buy according to finance media. While we acknowledge the potential of CCSI as an investment, our conviction lies in the belief that AI stocks hold great promise for delivering high returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than CCSI but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.