Evercore Warns AI IPOs Could Pressure These Struggling Stocks. IBM and AppLovin Face Different Tests

Evercore ISI cautioned on September 7 that potential AI IPOs could impact certain stocks. IBM and AppLovin Corporation were highlighted as possible casualties. The firm's analysts identified underperforming stocks with negative earnings-revision trends that may face extra pressure due to upcoming AI listings and seasonal tax-loss selling.

For IBM, the issue lies in regaining operating momentum, as its software revenue grew 5% to $7.8 billion in the second quarter, while Red Hat increased 11%. However, infrastructure revenue fell 7%, and IBM Z dropped 42%. The firm's free cash flow declined by $300 million to $2.5 billion. AppLovin, on the other hand, reported a 53% revenue increase to $1.924 billion in the June quarter, with $863.3 million in free cash flow.

The company's advertising platform demonstrates an existing commercial application of AI, attracting customers based on measurable marketing results. However, sustaining these results in a competitive advertising market while expanding to new customers poses a challenge. The key question is whether price declines result from temporary portfolio adjustments or deteriorating business economics.

While IBM and AppLovin may be interesting investments, analysts believe other AI stocks could offer greater upside potential with less downside risk.