The Potential Decline of AI Stocks: What Investors Need to Know
Over the past two years, few trends have grabbed the attention of both professional and everyday investors quite like artificial intelligence (AI). This technology, which allows software and systems to make decisions, reason, and grow independently of human assistance, is still in its early stages but shows promise across various industries worldwide. Analysts from PwC predict that AI can increase global GDP by 26% by 2030.
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Wall Street has taken note of the expanding market for AI technology. Financial institutions anticipate that leading AI stocks could continue to rise; however, not all predictions are optimistic.
Based on conservative targets from a couple of Wall Street analysts, two of the most talked-about AI stocks might drop by as much as 94%!
Palantir Technologies: Expected Decline of 61%
One AI stock that could see a significant drop is Palantir Technologies (NASDAQ: PLTR). This data-mining company has seen its shares soar over 1,500% since the beginning of 2023.
Despite this remarkable growth, RBC Capital analyst Rishi Jaluria predicts Palantir’s stock could fall to $40, marking a 61% decline from its price on February 4. Interestingly, this price target was raised from $11 following the company’s strong fourth-quarter results and an optimistic outlook for 2025.
Jaluria’s doubts about Palantir stem from “concerns regarding growth potential and product differentiation,” alongside the fact that the shares are “trading at a premium multiple,” according to his note to investors.
Palantir’s competitive edge is evident with its AI-driven Gotham platform for government missions and the Foundry platform for businesses. These innovations have resulted in steady operating cash flow and future contracts.
However, there are valid reasons to consider Jaluria’s $40 price target as plausible. The main profit driver, Gotham, is limited to use by the U.S. and allied nations, which restricts its potential customer base.
Historically, innovations like those seen with the internet have often experienced bubble bursts. Investors typically overrate how quickly a new technology will be embraced. Although Palantir’s contracts may cushion it against a potential AI downturn, emotional market behaviors are unpredictable.
Lastly, Palantir currently trades at an astonishing price-to-sales ratio of 83, a figure that seems unsustainable compared to the historical norms of around 30 to 40 for similar businesses.
AI plays a key role in the safety aspect of Tesla EVs. Image source: Tesla.
Tesla: Projected Drop of 94%
Another AI stock facing bleak predictions is electric-vehicle manufacturer Tesla (NASDAQ: TSLA). The company’s vehicles heavily rely on AI for the full self-driving (FSD) software that enables navigation and obstacle avoidance.
According to GLJ Research founder Gordon Johnson, Tesla is projected to hit $24.86 per share, which would represent a staggering 94% decline from its value on February 4. This prediction stems from applying a 15X earnings multiple and factoring in a 9% discount rate.
Much like Palantir, Tesla has benefited from its early-mover advantage and has achieved remarkable gains as the only profitable player in the EV sector. It has successfully transitioned to mass production without the backing of legacy automotive manufacturers for over fifty years.
Tesla is also diversifying beyond just automobiles, expanding its energy and storage segments to reduce the cyclical impacts that often affect car sales.
Johnson’s long-standing bearish view on Tesla is due to expected margin challenges as a result of discounting, as well as the company’s reliance on income sources that may not be sustainable.
Since 2023, Tesla has been cutting prices on its EV models multiple times. As competition increases and demand for EVs softens, it puts pressure on the company’s vehicle margins. While inventory levels have improved, they remain higher than in previous years.
Johnson also highlights the issue with Tesla’s income from regulatory credits, which comprise a significant part of its pre-tax income. This reliance on non-core income sources may face scrutiny moving forward, especially as they contribute little to the company’s core business growth.
Perhaps the most pressing concern for Tesla, and its shareholders, is CEO Elon Musk. Although he has led new product launches, he has failed to fulfill many promises over the years, particularly regarding the delivery timelines for achieving Level 5 autonomy in FSD. This history of unmet expectations might lend credibility to Johnson’s low price prediction for Tesla.
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Sean Williams has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Palantir Technologies and Tesla. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
