Over the past two years, there has been no bigger catalyst or louder trend on Wall Street than rising prices. artificial intelligence (AI). The ability of software and AI-based systems to become more efficient at the tasks assigned to them, as well as evolve to learn new skills over time, gives this revolutionary technology a virtually limitless ceiling.
Despite an impressive $15.7 trillion addressable market by 2030, according to PwC estimates in 2017, Sizing the priceNot all Wall Street analysts are necessarily optimistic about the companies leading the charge on AI. Keeping in mind that analyst price targets are fluid and often reactive rather than proactive, two seemingly unstoppable AI stocks may plunge as much as 94% in 2025, based on the price targets of some analysts at Wall Street.
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Although the graphics processing unit (GPU) company Nvidia usually hogs the spotlight, there has perhaps been no hotter AI stock on the planet in recent months than that of the cloud-based data mining specialist. Palantir Technologies (NASDAQ:PLTR).
Palantir shares are up 343% this year, as of Dec. 6, and 980% over the past two years. These outsized returns are a function of its AI-powered Gotham platform and its AI and machine learning-driven Foundry platform, be unique on a large scale.
Gotham is a service that federal governments use for mission planning and execution, as well as data collection. Because these contracts typically span four or five years and are with the U.S. government and its immediate allies, Palantir is able to generate predictable operating cash flows, with little worry about paying it out.
At the same time, Foundry aims to help businesses better understand their data to streamline operations and improve profitability. This segment is still very early in its expansion, with Foundry’s commercial customer count jumping 51% to 498 in the quarter ended September compared to the year-ago period.
Yet despite this seemingly perfect positioning for Palantir, RBC Capital analyst Rishi Jaluria estimates the company’s shares are worth (drumroll) $9, which would represent a staggering 88% drop from the close actions of December 6. recent investor note,
We can’t understand why Palantir is the most expensive name in the software industry… Absent a substantial up-and-coming quarter that would elevate the near-term growth trajectory, the valuation appears unsustainable.
Without a doubt, valuation is Palantir’s biggest concern. Based on Wall Street’s consensus sales forecast of $3.47 billion for 2025, this is valued at 50 times next year’s revenue. Market-leading companies in a bubble have traditionally peaked at around 40 times sales in the past (e.g., before the dotcom bubble). Palantir’s price-to-sales multiple far exceeds historical bubble territory.
The other problem for Palantir is that there is a natural ceiling built into its profitable Gotham segment. Although it generates significant revenue from the US government and its immediate allies, most governments around the world will not have access to this AI-based platform, limiting its long-term appeal.
Although Palantir has a seemingly secure moat, its near-parabolic rise is likely unsustainable.
The Model 3 is Tesla’s best-selling sedan. Image source: Tesla.
The other artificial intelligence stock that at least one Wall Street analyst thinks will plunge in the new year is the electric vehicle (EV) maker. Tesla (NASDAQ:TSLA).
Since Donald Trump won re-election last month, Tesla shares have been burning rubber on the rise. CEO Elon Musk’s ties to the president-elect are seen as positive for Tesla. With Trump in the Oval Office, it’s possible that self-driving regulations could be relaxed, which could allow Tesla to realize its ambitious plan to flood the roads with robo-taxis in the coming years. AI plays a key role in Tesla’s fully autonomous driving technology.
Tesla bulls are also excited about the company’s continued efforts in energy products. Revenue from energy generation and storage jumped 52% in the third quarter to $2.38 billion from the year-ago period, with the segment offering the prospect of juicier margins than selling of electric vehicles.
And let’s not forget Tesla’s greatest competitive advantage: its proven profitability. Tesla is closing in on its fifth consecutive year of generally accepted accounting principles (GAAP) profits. Meanwhile, the EV segments for incumbent automakers and most emerging EV companies haven’t gathered even a single quarter of GAAP profits.
But according to Gordon Johnson of GLJ Research, who is a long-time Tesla bear, North America’s leading electric vehicle stock is on the verge of collapse. Johnson’s very specific price target for Tesla is $24.86 per share, arrived at by placing a 15x forward earnings multiple on the stock, along with a 9% discount rate to price current action. If Johnson was right, Tesla shares would fall 94% in 2025.
Although Johnson has criticized Tesla’s electric vehicle safety and accounting practices in the past, there are three other reasons why the company’s current stock price of $389.22 is unjustifiable.
For starters, competition has intensified significantly in the electric vehicle space and made Tesla’s once-large margins on vehicles look pedestrian. Since the start of 2023, Tesla has undertaken more than half a dozen sweeping fleet price reductions to boost demand and prevent inventory levels from rising. Despite these aggressive reductions, global inventories still climbed and operating margin plunged. Paying a multiple of 119 times next year’s earnings for an auto stock whose margins are no higher than those of traditional automakers makes no sense.
Second, 51% of Tesla’s pretax profit this year comes from unsustainable sources, which include auto regulatory credits and interest income on its cash flow. Investors would expect a company whose shares enjoy a notable valuation premium to generate profits from its operations. But in reality, a slight majority of Tesla’s profits come from unsustainable sources.
The third problem for Tesla is that Elon Musk has failed to live up to expectations. Investors factored Musk’s promises into the company’s valuation, but he regularly failed to deliver on his promises. For example, he has promised that full Level 5 autonomous driving would be “a year away” for more than a decade. Removing Musk’s broken promises from the equation would result in a rapid decline in Tesla’s stock price.
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Sean Williams has no position in any of the stocks mentioned. The Motley Fool ranks and recommends Nvidia, Palantir Technologies and Tesla. The Motley Fool has a disclosure policy.
