A trio of Wall Street analysts believe the party is about to end for some of Wall Street’s artificial intelligence (AI) stocks.
For three decades, Wall Street and the investment community have been waiting for a breakthrough innovation or technology that could rival, or even surpass, what the Internet has brought to corporate America. The rise of artificial intelligence (AI) may be just the thing.
When I talk about AI, I’m generally referring to the use of software and systems to handle tasks that humans would normally be responsible for. What makes AI a potential fundamental innovation is the ability of software and systems to learn without human oversight. This ability to become more efficient at performing tasks over time, as well as to learn new tasks, makes this technology useful in virtually every aspect of the U.S. and global economy.
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The scale of the AI revolution is open to interpretation and imagination. But according to ambitious estimates by PwC analysts, AI could add $15.7 trillion to the global economy by 2030. PwC came to this conclusion by deducing that $6.6 trillion would be added by productivity gains, with the remaining $9.1 trillion coming from consumer-side benefits.
Such high numbers are not lost on the brightest minds on Wall Street. Most Wall Street institutions and analysts have set high growth expectations and very lofty price targets for the leading AI stocks.
But there are exceptions.
Based on the low price targets set by some Wall Street analysts, the following three top artificial intelligence stocks could fall as much as 91%.
Palantir Technologies: down 65%
The first major AI stock that could be dumped, according to a Wall Street analyst’s prediction, is a data mining specialist. Palantir Technologies (PLTR 5.34%).
While one analyst estimates that Palantir is still offering 35% more than its July 3 closing price, RBC Capital’s Rishi Jaluria estimates that the stock is worth $9. If that forecast proves correct, one of the hottest stocks in the AI space could fall 65%!
While Palantir’s longtime owner Jaluria acknowledges that its operating results have been strong, a May 2024 note suggests that the company’s commercial segment is concerned. Specifically, Jaluria cites revenue that has been pulled from special purpose acquisition companies (SPACs) that had signed deals with Palantir. It’s unclear how sustainable or recurring that revenue will be.
While Jaluria’s concern is justified (most SPACs have been disasters for investors), Palantir brings identifiable competitive advantages that are clearly TO DO deserve a certain premium. For example, the breadth of services provided by Palantir cannot be replicated on a large scale by any other company.
Palantir’s long-standing business segment has been Gotham, the AI-powered platform that helps governments collect data and plan missions, among other tasks. The company typically wins multi-year contracts from governments using Gotham, leading to sustained double-digit sales growth and predictable cash flow.
However, the company’s future likely rests on the success of its Foundry platform, the aforementioned “commercial” segment. Foundry’s mission is to help businesses understand their data so they can streamline their operations. The number of commercial customers has grown by 53% over the last year (as of March 31, 2024), although this segment is still in its infancy. very early stages of growth.
While Palantir can generate sustained double-digit sales growth and is irreplaceable at scale, a forward price-to-earnings (P/E) ratio of 65 and a price-to-sales ratio of 25 (based on trailing 12-month sales) are tough pills to swallow in an already expensive stock market.
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Nvidia: 22% drop
A second AI stock that could face a major blow next is the one that has benefited most from the AI revolution: semiconductor giant Nvidia (NVDA -1.91%).
Although most Wall Street analysts can’t set their price targets high enough for this leading AI stock, German BankRoss Seymour set a price target of $100 in May ($1,000 before Nvidia’s 10-for-1 stock split). If Nvidia reached $100 per share, it would lose 22% of its current value, which would translate into a market cap loss of nearly $700 billion.
In many ways, Nvidia’s expansion has gone smoothly. The company’s H100 graphics processing unit (GPU) has quickly become the go-to chip for AI-accelerated data centers. Last year, Nvidia GPUs accounted for 98% of the 3.85 million AI GPUs shipped, according to TechInsights. With its next-generation Blackwell GPU architecture set to debut in the second half of this year, Nvidia should have no trouble maintaining its compute advantage in enterprise data centers.
History, however, has always been a thorn in the side of companies that lead great revolutions. Since the advent of the Internet, no innovation, technology or fashion trend has escaped a bubble at its inception. Investors have a habit of overestimating the adoption and growth potential of new innovations and technologies, without giving them time to mature. Artificial intelligence does not seem to be an exception to this unspoken rule.
Nvidia’s fiscal Q2 adjusted gross margin guidance of 75.5% (+/- 50 basis points) may also be a worrying warning. While an adjusted gross margin of 75.5% is still GOOD Above its historical norm, this represents a decline of 235 to 335 basis points from the previous quarter. Putting two and two together, this suggests that competitive pressures have come into play.
Outside competitors are launching or ramping up production of their respective AI GPUs in the second half of the year, while Nvidia’s top four customers by net sales are all developing their own AI accelerator chips for their data centers. The GPU shortage responsible for Nvidia’s sky-high adjusted gross margin looks set to ease — and that’s potentially bad news for investors.
Tesla: down 91%
However, the potential disaster of the day AI stocks include the world’s most valuable electric vehicle (EV) maker You’re here (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 integrating AI into its electric vehicles.
In mid-April, GLJ Research’s Gordon Johnson, a longtime Tesla bear, lowered his very specific price target on Tesla to $22.86 per share. Historically, Johnson has arrived at his price targets by placing a 15x multiple on his estimate of the company’s future annual earnings and applying a 9% discount rate to the current price.
There’s no denying that Tesla has accomplished what’s been impossible in the auto industry for more than half a century. CEO Elon Musk has successfully scaled the company from the ground up to mass production, and has delivered four consecutive years of generally accepted accounting principles (GAAP) profits. But the accolades stop there.
Over the past 18 months, Tesla has cut the selling price of its fleet of electric vehicles more than half a dozen times. With its first-mover advantage fading and competition intensifying, Musk has had no choice but to become more competitive on price. The end result has been a sharp reduction in the company’s operating margin, a return to a free cash outflow situation in the first quarter, and a sharp increase in the company’s electric vehicle inventory.
Moreover, Tesla’s efforts to become more than a car company have largely failed. While it has some small victories to its credit, the growth rate of Tesla’s energy generation and storage segment has declined significantly, while gross margins for services are in the single digits. As much as investors want to pretend that Tesla is an energy or technology company, the bulk of its sales and profits still come from its now-struggling and cyclical electric vehicle business.
The other factor hurting Tesla is Musk’s long list of promises and innovations that have failed to materialize. After a full decade of promising Level 5 autonomy for his company’s electric vehicles, Tesla’s FSD has not budged from Level 2. Additionally, the Cybertruck was an early failure, with numerous recalls and subpar deliveries.
Tesla is an auto stock with shrinking margins and declining EV deliveries that is trading at a premium to the top AI stocks. While a 91% drop may be a bit extreme, I have to agree with Gordon Johnson that significant a decline seems likely.
