What's the modern-day equivalent of King Midas turning everything he touched into gold? Artificial intelligence (AI) is the leading candidate, with many AI stocks having skyrocketed in the past 18 months. NVIDIA (NASDAQ: NVDA) Most famously, demand for the company's AI chips has propelled its market capitalization to more than $3 trillion.
But all good things come to an end. While analysts still think Nvidia has more room to grow, they're not as optimistic about all AI stocks. Here are three high-flying AI stocks that Wall Street thinks will fall.
1. ARM Holdings
of stocks Arm Holdings (Nasdaq: ARM) It has surged more than 120% year to date, a gain not as large as Nvidia's, but comparable.
Arm designs the semiconductors and software widely used in central processing units (CPUs). The company's revenue rose 47% year-over-year to $928 million in the most recent quarter, a record, with more than half of that revenue coming from royalties paid by customers who use its chip architecture.
AI is a key growth driver for Arm. The company believes that demand for energy-efficient AI capabilities in data centers and edge devices will drive increased sales of its technology. The company is particularly optimistic about the prospects for Nvidia's Grace Blackwell superchip, which combines Nvidia's Blackwell graphics processing unit (GPU) architecture with Arm's Grace CPU.
However, Wall Street is not bullish on ARM's near-term prospects. The average 12-month target price for the stock is 29% below the current price, and the most pessimistic analyst predicts that ARM's stock price could fall by 65%.
2. Palantir
Palantir Technologies (NYSE: PLTR) is a big AI winner: Shares of the data analytics software developer are on track to rise nearly 50% in 2024, thanks in large part to a big rally in February.
The company's flagship product is its artificial intelligence platform (AIP). Palantir's revenue is expected to grow 21% year over year to $634 million in the first quarter of 2024, driven primarily by momentum from AIP.
“The uses for AIP are seemingly limitless,” said Ryan Taylor, Palantir's chief revenue officer and chief legal officer, during the company's first-quarter earnings call. “We shared our market-going plans with AIP, and the results show that our strategy is not only succeeding, but accelerating,” he said.
Despite AIP's outlook, analysts believe Palantir's momentum will grind to a halt soon. The company's average 12-month target price is about 15% below the current stock price.
3. Arista Networks
Arista Networks (NYSE: ANET) Arista has taken investors on a rollercoaster ride this year, but it's been an overall more enjoyable one for investors, with Arista shares soaring 50%.
The company provides cloud networking technology. AI is a huge driver as organizations rapidly move to the cloud to train and deploy large language models (LLMs). Arista is a direct beneficiary of this trend, with first-quarter revenue growing more than 16% year over year to $1.57 billion.
Arista CEO Jayshree Ullal sees even more growth ahead: She estimates the market for client-to-cloud AI networking is at least $60 billion, and it's a market she thinks Arista is positioned to win.
Wall Street isn't overly pessimistic about Arysta, but it's not overly optimistic either: The company's average 12-month price target is about 6% below the current share price.
Is Wall Street right about these AI stocks?
Analyst price targets for Arm, Palantir and Arista may or may not be prescient, and no one knows how any stock will perform over the next 12 months.
However, we note that the growth prospects of the three AI stocks appear to already be largely priced into their stock prices: Arm, Palantir and Arista all have price-to-earnings growth (PEG) ratios near or above 2.0, based on five-year growth projections.
My view is that these stocks are likely to continue to rise over the long term, but I wouldn't be surprised if some or all of these stocks decline a little over the next 12 months.
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Keith Speights has no position in any of the stocks mentioned. The Motley Fool owns shares in and recommends Arista Networks, Nvidia, and Palantir Technologies. The Motley Fool has a disclosure policy.
Wall Street thinks these high-flying artificial intelligence (AI) stocks are about to fall (hint: Nvidia isn't one of them) was originally published by The Motley Fool.
