Over the past three decades, investors and analysts have eagerly awaited a transformative technology that could rival the impact of the internet on businesses. The emergence of artificial intelligence (AI) presents a promising contender. When we refer to AI, we are alluding to the utilization of software and systems to execute tasks traditionally handled by humans, with the distinguishing feature being the capacity for autonomous learning. This adaptability, enabling software to enhance its performance and acquire new skills over time, positions AI as a versatile innovation with applications spanning the spectrum of the U.S. and global economies.
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The exponential potential of the AI revolution is open to speculation and vision. According to projections by PwC, artificial intelligence could inject a staggering $15.7 trillion into the global economy by 2030. PwC’s analysis anticipates $6.6 trillion in productivity gains, with an additional $9.1 trillion attributed to consumption-side advantages.
This monumental economic impact has not escaped the notice of Wall Street’s keenest minds. Financial institutions and analysts have set ambitious growth forecasts and stratospheric price targets for leading AI equities.
However, amidst the widespread optimism, there exist dissenting voices.
According to conservative estimates by select Wall Street analysts, three prominent artificial intelligence stocks could potentially experience a substantial decline of up to 91%.
Palantir Technologies: Forecasting a Drop of 65%
One standout AI stock that has been singled out for a significant downturn, based on the projections of a Wall Street analyst, is data analytics specialist Palantir Technologies (NYSE: PLTR).
While the consensus indicates a 35% upside potential from its July 3 closing price, Rishi Jaluria of RBC Capital argues that the stock is realistically valued at $9 per share. Should this prediction materialize, one of the hottest AI stocks would be in for a staggering 65% plunge!
Although Jaluria acknowledges Palantir’s robust operating performance, a note from May 2024 highlights concerns regarding the company’s commercial segment. Specifically, there are reservations about the sustainability and recurrence of revenues derived from special purpose acquisition companies (SPACs) that have engaged with Palantir. The longevity of this revenue stream remains uncertain.
Despite valid concerns about SPACs, which have often led to disappointing returns for investors, Palantir boasts distinct competitive advantages that warrant acknowledgment. For instance, Palantir provides a suite of services that cannot be replicated on a large scale by any other entity.
While Palantir’s cornerstone business has centered on Gotham, an AI-driven platform aiding governments in data aggregation and mission planning, the future vitality of the company hinges on the success of its Foundry platform, designed to assist businesses in optimizing their data analytics. Although commercial customer growth has surged by 53% over the past year, the segment is still in its nascent stages of development.
Despite the potential for sustained double-digit revenue growth and unparalleled scalability, Palantir’s forward price-to-earnings (P/E) ratio of 65 and a price-to-sales ratio of 25 (based on trailing 12-month sales) present significant valuation challenges amid an already inflated stock market.
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Nvidia: Envisioning a Decline of 22%
Another AI-centric entity poised for a potential setback is Nvidia (NASDAQ: NVDA), the semiconductor titan that has been a key beneficiary of the AI revolution.
While most analysts continue to escalate their price targets for this leading AI stock, Ross Seymour from Deutsche Bank outlined a $100 price target ($1,000 pre-Nvidia’s 10-for-1 stock split) in May. If Nvidia were to hit the $100 threshold, it would mark a 22% depreciation from its current value, translating to nearly $700 billion in lost market capitalization.
Nvidia’s evolution has been nothing short of flawless. The company’s H100 graphics processing unit (GPU) has swiftly emerged as the preferred chip for AI-accelerated data centers. TechInsights data from last year indicates that Nvidia’s GPUs accounted for 98% of the 3.85 million AI-GPUs shipped. With the advent of the next-generation Blackwell GPU
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As architecture prepares to step onto the grand stage in the latter part of this year, Nvidia is poised to uphold its dominance in enterprise data centers effortlessly.
The Thorn of History Lurking for Innovators
Throughout the turbulent annals of time, businesses pioneering revolutionary advancements have often stumbled upon the thorny path of history. From the emergence of the internet to the latest groundbreaking technologies, the landscape is littered with bubbles that burst prematurely. Innovations frequently face the peril of overestimated adoption and growth prospects, surfacing before they can fully mature.
Nvidia’s forecast of a 75.5% (+/- 50 basis points) adjusted gross margin for the fiscal second quarter may portend stormy weather. While this figure remains above its historical average, the projected decline from the previous quarter raises red flags, indicating encroaching competitive pressures.
Rival companies are gearing up to release AI-GPUs, potentially eating into Nvidia’s market share later this year. Simultaneously, Nvidia’s top clients are developing their AI-accelerating chips, threatening the GPU scarcity that fueled Nvidia’s soaring adjusted gross margin. This impending scenario spells trouble for investors eyeing Nvidia’s shares.
Tesla’s Looming Shadow with a 91% Implied Downside
Today, amongst the AI stock landscape, Tesla stands out as the headline-grabbing subject. As the world’s most valuable electric vehicle (EV) manufacturer, Tesla integrates AI supremacy into its vehicles through its full self-driving (FSD) software.
In a recent shift, long-time Tesla skeptic Gordon Johnson slashed his price target for the company, highlighting potential perils ahead. Despite Tesla’s unprecedented achievements under Elon Musk’s leadership, including consistent GAAP profits, concerns loom large.
Over the past year and a half, Tesla has engaged in multiple price reductions for its EV lineup, marking a sharp decline in operating margins, a return to free cash outflow, and a surge in EV inventory holdings. Tesla’s expansion into non-auto sectors has not borne fruit, with energy generation and storage growth tapering off, while service margins remain modest.
The dwindling promise of Musk’s grand visions, exemplified by stalled FSD progress and the underwhelming Cybertruck launch, casts a shadow on Tesla’s future prospects. With contracting margins and weakening EV sales, Tesla’s stock, trading at a premium, faces a potential steep decline, as cautioned by analysts.
Is Palantir Technologies a $1,000-Worthy Investment?
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