Three Wall Street analysts believe the party may soon be over for some of Wall Street's fastest-growing artificial intelligence (AI) stocks.
For the past 30 years, Wall Street and the investment community have been waiting for a game-changing innovation or technology that could match or surpass what the internet has done for American companies. The rise of artificial intelligence (AI) may just fit that bill.
When I talk about AI, broadly speaking, I'm talking about using software and systems to handle tasks that are typically the responsibility of humans. What makes AI such a potential foundational innovation is the ability of software and systems to learn without human oversight. Its ability to become more efficient at tasks over time and learn new tasks makes the technology useful in nearly every aspect of the U.S. and global economy.
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Just how big the AI revolution will be is open to interpretation and imagination, but one bold estimate from analysts at PwC is that artificial intelligence could add $15.7 trillion in value to the global economy by 2030. PwC came to this conclusion by deducing that an additional $6.6 trillion would come from productivity gains, while the remaining $9.1 trillion would come from consumption-side benefits.
Such a large sum is not incomprehensible to the brightest minds on Wall Street, where most institutional investors and analysts have high growth expectations and lofty price targets for the market-leading AI stocks.
However, there are exceptions.
Based on the lowest price targets offered by Wall Street analysts, these three leading artificial intelligence stocks could fall by as much as 91%.
Palantir Technologies: Expected to fall 65%
Wall Street analysts predict that the top AI stocks likely to go under first are data-mining specialists. Palantir Technologies (supplement 5.34%).
One analyst believes Palantir still has room to rise 35% from its July 3 closing price, while RBC Capital's Rishi Jhallia thinks Palantir's stock is worth $9 per share. If this prediction proves correct, it would represent a 65% plunge for one of the hottest AI stocks.
Jallia, who has long been a downer of Palantir, acknowledges that the company's performance is strong, but hints at concerns about the company's commercial division in its May 2024 filing. Specifically, Jallia points to revenue that was pre-earned from a special purpose acquisition company (SPAC) that struck a deal with Palantir. It's unclear how sustainable and recurring this revenue is.
While Jarrulia's concerns are valid — most SPACs have been disasters for investors — Palantir clearly brings a distinct competitive advantage. do Worth the premium. For example, the range of services that Palantir offers can't be replicated at scale by any other company.
Palantir's main business has long been Gotham, an AI-driven platform that helps governments with data collection, mission planning, and other tasks. The company typically uses Gotham to win multi-year government contracts, which has led to sustained double-digit revenue growth and predictable cash flows.
But the company's future likely hinges on the success of its aforementioned “commerce” segment, the Foundry platform. Foundry's mission is to help companies understand their data and make their operations more efficient. While the segment is still developing, the number of commercial customers has surged 53% over the past year (as of March 31, 2024). very Early stage of growth.
Palantir can deliver sustained double-digit sales growth and is irreplaceable in terms of size, but its forward price-to-earnings (P/E) ratio of 65 and price-to-sales multiple of 25 (based on trailing 12-month sales) are hard to swallow in an already-floating stock market.
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NVIDIA: 22% drop suggested
The second artificial intelligence stock that could be hit hard is the semiconductor giant, one of the companies that stands to benefit most from the AI revolution. NVIDIA (NVDA -1.91%).
Most Wall Street analysts can't set their price targets high enough for this leading AI stock, but… Deutsche BankRoss Seymour of NVIDIA set a $100 price target in May (compared to $1,000 before NVIDIA's 1-for-10 stock split). If NVIDIA hits $100 a share, the company's market capitalization would fall 22% from its current value, wiping out about $700 billion in market capitalization.
In many ways, Nvidia's expansion has been perfect. The company's H100 graphics processing units (GPUs) have quickly become the go-to chip for AI-accelerated data centers. Of the 3.85 million AI-GPUs shipped last year, Nvidia's GPUs accounted for 98% of them, according to TechInsights. With its next-generation Blackwell GPU architecture set to debut later this year, Nvidia should have no trouble maintaining its computing dominance in enterprise data centers.
But history has always been a curse for companies pioneering the next great revolution. Since the advent of the Internet, no buzzy innovation, technology, or trend has avoided an initial bubble. Investors tend to overestimate the adoption and growth potential of new innovations and technologies, without giving them time to mature. Artificial intelligence is unlikely to be an exception to this unspoken rule.
NVIDIA's second-quarter adjusted gross margin forecast of 75.5% (+/- 50 basis points) may also be an ominous warning. good This is above historical norms and represents a decline of 235-335 basis points from the previous quarter. Taken together, these two factors suggest increasing competitive pressures.
Outside competitors are releasing their own AI-GPUs later this year or ramping up production, while Nvidia's top four customers by net sales are all developing their own AI-accelerated chips for their data centers.The GPU shortage that's been driving Nvidia's sharp rise in adjusted gross margins is expected to abate going forward, which could be bad news for investors.
Tesla: 91% drop suggested
But potential disaster today AI is the world's most valuable electric vehicle (EV) manufacturer. Tesla (TSLA 2.08%)The company's full self-driving (FSD) software, which uses a network of cameras and ultrasonic sensors to avoid obstacles, is a perfect example of how Tesla is incorporating AI into its EVs.
In mid-April, Gordon Johnson of GLJ Research, a longtime Tesla bear, lowered his price target for Tesla to $22.86 a share. Johnson had previously calculated his target by applying a multiple of 15 times Tesla's expected future earnings and a 9% discount to the current stock price.
There's no denying that Tesla has accomplished something that has been considered impossible in the auto industry for more than half a century: CEO Elon Musk has successfully led the company from scratch to mass production and achieved four consecutive years of generally accepted accounting principles (GAAP) profits. But the accolades stop there.
Over the past 18 months, Tesla has significantly cut the selling price of its EVs at least six times. With first-mover advantage fading and competition heating up, Musk had no choice but to become more price competitive. As a result, the company's operating margins have fallen sharply, free cash flow reversed in the first quarter, and EV inventory has risen significantly.
Moreover, Tesla's efforts to become more than a car company have largely failed. While the company has had some small victories, growth in its energy generation and storage division has slowed significantly, and gross margins in its services division remain in the low single digits. Investors want to portray Tesla as an energy or tech company, but the vast majority of the company's revenue and profits come from its currently struggling and cyclical EV business.
Another fatal factor for Tesla was the numerous promises and innovations that Musk failed to deliver on: A full decade after he promised Level 5 autonomy for Tesla EVs, Tesla's FSD has not moved beyond Level 2 autonomy. Additionally, the Cybertruck suffered early failures, multiple recalls, and poor deliveries.
Tesla is an auto stock with shrinking margins and declining EV deliveries, trading higher than the highest-priced AI stock. A 91% drop may be a bit extreme, but I have to agree with Gordon Johnson. important A decline seems likely.
