The Rise and Fall of AI Stocks: What’s Next for Investors?
Since hitting a low point in October 2022, Wall Street has experienced a bullish rally. The Dow Jones Industrial Average, benchmark S&P 500, and growth-oriented Nasdaq Composite surged to numerous record highs last year.
This market rally has been driven by various factors, including impressive earnings, a shift in the Federal Reserve’s stance, excitement over stock splits, and Donald Trump’s November election win. However, the most significant impetus has been the rise of artificial intelligence (AI).
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Artificial intelligence enables software and systems to perform tasks more efficiently and to learn new skills autonomously. This capacity for growth gives AI virtually endless applications, with a projected $15.7 trillion market by 2030, according to PwC analysts.
Image source: Getty Images.
History has taught us that not every company involved in the latest trends will succeed, a lesson that resonates with Wall Street analysts today.
For instance, while one analyst projects a significant rise of up to 115% for a leading AI hardware provider by 2025, another warns that a top AI stock may plummet by up to 84% in the coming year.
Advanced Micro Devices: Poised for a Comeback in 2025
After hitting a 52-week low on January 10, semiconductor giant Advanced Micro Devices (NASDAQ: AMD) is considered one of the top stocks to watch for the first half of 2025. Analyst Hans Mosesmann of Rosenblatt Securities has set a price target of $250 for AMD, indicating a potential 115% increase from recent share prices.
In a note to clients last December, Mosesmann outlined several reasons for his optimistic outlook. First, he expects AMD to gain ground on Intel in the central processing unit (CPU) market. Although CPU growth has slowed, an anticipated increase in laptop and desktop sales in 2025 could boost both AMD and Intel.
According to Mercury Research, AMD held a 28.7% share of the desktop processor market in the third quarter of 2024, an increase of 8.5 percentage points from the previous year. The robust margins and cash flow from CPU sales are poised to strengthen AMD’s financial performance.
Mosesmann also anticipates that AMD will capture some market share in graphics processing units (GPUs) from AI powerhouse Nvidia (NASDAQ: NVDA).
Nvidia’s Hopper (H100) and next-gen Blackwell GPUs are currently unmatched in speed, creating strong demand and pricing power. Conversely, AMD’s Instinct-series GPUs present a more competitive price, making them an attractive option for businesses eager to capitalize on AI without lengthy wait times for Nvidia’s products.
As AMD’s stock trades at less than 23 times its forward-year earnings, there appears to be room for growth heading into 2025. However, should the AI hype collapse—as historical trends suggest—AMD could face significant challenges.
Image source: Getty Images.
Palantir Technologies: Facing Potential Decline
On the other hand, analyst Rishi Jaluria of RBC Capital Markets predicts that the currently popular AI stock, Palantir Technologies (NASDAQ: PLTR), may drop to $11 per share, suggesting an 84% decline possible in the upcoming year.
Despite beginning 2024 on a shaky note—shares have declined 11% as of January 10—Palantir’s stock has soared 934% over the past two years. This surge is due to Palantir’s unique AI-driven data-mining capabilities and improved financial performance.
Palantir’s distinct operating model includes its Gotham platform, which is employed by the U.S. government and allied countries for sensitive data analysis. Meanwhile, the Foundry platform leverages AI and machine learning to assist businesses in understanding their data. The absence of direct competitors for Palantir’s services has led to a high stock valuation.
However, Jaluria raises concerns about Palantir’s future growth rates. He questions whether the company can continue its rapid sales expansion, highlighting potential reliance on specific government contracts and possible slowdown in Foundry’s growth.
Gotham’s long-term growth is also limited by its exclusive access granted to the U.S. and its allies, restricting broader potential. Additionally, Jaluria is wary of Palantir’s high valuation. While major players during the dot-com boom were valued around 40 times sales, and Nvidia peaked over 40 times sales in mid-2024, Palantir remains at 61 times trailing-12-month sales—a concerning premium that history indicates may not last.
While an 84% decline seems extreme for a profitable company, Jaluria’s viewpoint that Palantir’s stock may need to correct seems reasonable.
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Sean Williams has positions in Intel. The Motley Fool has positions in and recommends Advanced Micro Devices, Intel, Nvidia, and Palantir Technologies. The Motley Fool recommends the following options: short February 2025 $27 calls on Intel. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.
