Anytime folks get overexcited about a new trend, they flood the market with money...

And then, the locusts descend. Con artists can't resist jumping in to take advantage of unsuspecting investors.

It doesn't matter what the hype-train du jour is...

We saw it with electric vehicles – like Nikola (NKLA), which staged false promotional events... including a "road test" where a truck was just pushed down a slight slope.  Founder and ex-CEO Trevor Milton was sentenced to four years in prison for fraud this past December.

It happened with cryptocurrencies... like the scammers who offer "presales" on coins they never intend to release.

And now, it looks like AI is the next enticing field for the hype-train locusts to devour.

Google parent Alphabet's (GOOGL) AI division co-founder Demis Hassabis warned earlier this month that the industry is bound to follow suit. There's simply too much hype for it to escape unscathed.

Today, we'll delve into one of the suspected locusts in the AI space... and explain why investors should have known better than to buy in.

ReAlpha Tech (AIRE) was named one of the hottest property-technology startups of 2023...

The company claims to use "AI-focused technology" to allow retail investors to make money on short-term rental properties without owning them outright.

It didn't take long for the buzz to mount. ReAlpha went public on the Nasdaq last October. Shares skyrocketed 1,667% on its first trading day.

But by the next day, this apparent AI success story took a quick turn...

Investor confidence began to spiral, influenced by a negative report from short seller Spruce Point Capital Management.

Shares closed at $406.67 on October 23, reAlpha's first day as a public company. By October 24, they'd plunged 75%... to $100 per share.

They fell another 50% a couple days later. And shares now trade for about $0.70... down a shocking 99.8% in six months.

If investors had looked closer before jumping in, they would have noticed some glaring red flags...

For starters, the company has a history of legal issues.

ReAlpha Tech subsidiary reAlpha Asset Management ("RAM") previously submitted a request to sell securities in Massachusetts... and was denied because it failed to disclose ongoing criminal proceedings against CEO Giri Devanur.

The state also says RAM misleadingly used stock images of properties it didn't own... and didn't reveal a conflict of interest involving a board member who was also a seller-side agent for several of RAM's acquisitions.

This isn't the first time one of Devanur's ventures has flopped, either. His previous company, Gandhi City Research Park, liquidated following the collapse of Lehman Brothers.

An investor in the project alleged he was defrauded by Devanur way back in 2010. This led to criminal proceedings that began in 2018. 

AI is the latest young market trend to take center stage...

It won't be the last time investors throw caution to the wind while chasing a fad. And reAlpha won't be the last potential locust to take a bite out of their hard-earned cash.

Investors need to think critically about companies that claim to use AI... and how they claim to use it.

If you're having trouble understanding how AI benefits the business, there's every chance it's a marketing gimmick.

It's hard to say for sure if that's what is going on with reAlpha. That said, given all these other alarm bells... we wouldn't be surprised.

And even if reAlpha's use of AI is legitimate, management had a history of failed enterprises and allegedly shady dealings.

AI hype should never be a reason to overlook those blatant warning signs.


Joel Litman
April 23, 2024