Two industry-leading AI stocks could plummet in the new year, according to predictions from two Wall Street analysts.
Over the past two years, no trend has energized and talked about Wall Street more than the rise of artificial intelligence (AI). The ability of AI-driven software and systems to evolve to become more efficient at assigned tasks and learn new skills over time gives this innovative technology a virtually limitless upper limit. .
Despite the awe-inspiring market reaching $15.7 trillion by 2030, based on PwC’s “Prize Sizing” estimates, not all Wall Street analysts believe that I’m not bullish on companies that are leading the way in the AI space. Keeping in mind that analyst price targets are fluid and often reactive rather than proactive, the seemingly unstoppable 2 1 AI stocks could fall by up to 94% in 2025.
Image source: Getty Images.
Palantir Technologies: 88% downside potential
Graphics processing unit (GPU) company Nvidia usually gets all the attention, but in recent months, perhaps no AI stock on the planet has gotten more attention than cloud-based data mining specialist Palantir Technologies. (PLTR -2.17%).
Palantir stock is up 343% as of its close on Dec. 6 this year, and 980% in the two years since. These significant gains are due to the capabilities of our AI-driven Gotham platform and our Foundry platform, which leverages AI and machine learning, and are unmatched in scale.
Gotham is a service used by the federal government for mission planning and execution and data collection. These contracts typically span four to five years and are between the U.S. government and its direct allies, allowing Palantir to generate predictable operating cash flow with little worry about payments.
Foundry, on the other hand, aims to help businesses gain a deeper understanding of their data in order to streamline operations and improve profitability. The sector is still in the early stages of expansion, with Foundry’s commercial customer numbers soaring to 498 in the quarter to the end of September, up 51% year-on-year.
But despite this seemingly perfect positioning for Palantir, RBC Capital analyst Rishi Jallia believes the company’s stock is worth (drum roll) $9, which is as of Dec. 6. We believe this represents a staggering 88% drop from the stock’s closing price. Recent investor notes,
There’s no rational explanation why Palantir is the most expensive name in the software industry…without a substantial beat-and-raise quarter to boost its near-term growth trajectory, the valuation seems unsustainable. It seems to me.
There’s no question that valuation is the biggest concern for Palantir. Based on Wall Street’s consensus sales forecast of $3.47 billion in 2025, the company is valued at 50 times next year’s sales. Market-leading companies during bubbles have traditionally had peak sales of around 40 times sales in the past (before the dot-com bubble, for example). Palantir’s price-to-sales multiple is well beyond historical bubble territory.
Another problem for Palantir is that the lucrative Gotham segment has a natural ceiling built into it. Although it generates ample revenue for the U.S. government and its direct allies, most governments around the world do not have access to this AI-driven platform, limiting its long-term appeal.
Palantir appears to have a safe moat, but its near-parabolic climb is probably unsustainable.
The Model 3 is Tesla’s best-selling sedan. Image source: Tesla.
Tesla: 94% implied downside
Another artificial intelligence stock that at least one Wall Street analyst thinks will plummet in the new year is electric vehicle (EV) maker Tesla. (TSLA 2.87%).
Tesla stock has been trending higher since Donald Trump won re-election last month. CEO Elon Musk’s relationship with the president-elect is seen as a positive for Tesla. With President Trump in the Oval Office, self-driving regulations could be eased, paving the way for Tesla to realize its ambitious plans to flood the roads with robotaxis in the coming years. I don’t know. AI plays a key role in Tesla’s fully self-driving technology.
Tesla bulls are also excited about the company’s continued focus on energy products. Energy generation and storage revenue rose 52% year-over-year to $2.38 billion in the third quarter, making the segment more profitable than selling EVs.
And let’s not forget Tesla’s biggest competitive advantage: proven profitability. Tesla is closing in on generally accepted accounting principles (GAAP) earnings for the fifth year in a row. Meanwhile, the EV divisions of traditional automakers and most up-and-coming EV businesses account for less than a quarter of their GAAP profits.
But long-time Tesla Bear fan Gordon Johnson of GLJ Research says major North American EV stocks are headed for collapse. Johnson’s very specific price target for Tesla is $24.86 per share, which he achieves by assigning the stock a 15x forward earnings multiple and a 9% discount to the current stock price. If Johnson is right, Tesla stock will plummet 94% in 2025.
Johnson has criticized Tesla’s EV safety and accounting practices, but there are three other reasons why the company’s current stock price of $389.22 is unreasonable.
First, competition has intensified in the EV space, and Tesla’s once-mighty auto profit margins are starting to look mediocre. Since the start of 2023, Tesla has slashed prices on its vehicles more than six times to stimulate demand and keep inventory levels from rising. Despite these aggressive reductions, global inventories are still increasing and operating margins are declining. It doesn’t make sense to pay 119 times prior year earnings for an auto stock that doesn’t have higher margins than traditional automakers.
Second, 51% of Tesla’s pre-tax income this year comes from unsustainable sources such as regulatory vehicle credits and interest income from cash. Investors would expect a company trading at a significant valuation premium to be generating profits from its operations. But in reality, a small portion of Tesla’s profits come from unsustainable sources.
Tesla’s third problem is Elon Musk’s poor track record of meeting expectations. Investors have factored Musk’s promises into the company’s valuation, but he regularly fails to deliver on them. For more than a decade, for example, he has promised that Level 5 fully autonomous driving would be “in a year.” If Musk stands by his failed promises, Tesla’s stock price will plummet.
