Top 3 Artificial Intelligence (AI) Stocks That Could Fall Up to 91%, According to Select Wall Street Analysts

For the past 30 years, Wall Street and the investment community have been waiting for a game-changing innovation or technology to come along that could rival or surpass what the Internet did for corporate America. The rise of artificial intelligence (AI) may just fit the bill.

When I discuss AI, I’m talking loosely about using software and systems to handle tasks that humans would normally be responsible for. What makes AI such a potentially fundamental innovation is the ability for software and systems to learn without human supervision. This ability to become more efficient at tasks over time, as well as to learn new tasks, gives this technology utility in almost all aspects of the American and global economy.

How big the AI ​​revolution can be is left to interpretation and imagination. But according to high estimates provided by analysts at PwC, artificial intelligence has the capacity to add $15.7 trillion to the global economy by 2030. PwC concluded that $6.6 trillion would be added from productivity gains, with The remaining $9.1. trillion helped by gains on the consumption side.

Dollar figures this big are not lost on Wall Street’s smartest minds. Most Wall Street institutions and analysts have set high growth expectations and very high price targets for the market-leading AI stock.

But there are exceptions.

Based on bearish price targets from select Wall Street analysts, the next three major AI stocks could fall as much as 91%.

Palantir Technologies: 65% Implied Vulnerability

The first high-level artificial intelligence stock that can be taken to forestry, based on the predictions of a Wall Street analyst, is a data mining specialist. Palantir Technologies (PLTR 5.34%).

While one analyst believes Palantir still offers 35% upside from where it closed on July 3, RBC Capital’s Rishi Jaluria believes it’s worth $9 a share. If this prediction turns out to be correct, one of the hottest AI stocks would drop by 65%!

Although Palantir Bear Jaluria acknowledges that its operating results have been solid, a May 2024 note implies concern for the company’s commercial segment. Specifically, Jaluria points to revenue that has been pulled from special purpose acquisition companies (SPACs) that had signed deals with Palantir. It is not known how stable or recurring this income will be.

While Jaluria’s concern is valid — most SPACs have been disasters for investors — Palantir brings identifiable competitive advantages to the table that clearly I DO deserve a premium. For example, the scope of services offered by Palantir cannot be replicated at scale by any other business.

Palantir’s bread-and-butter operating segment has long been Gotham. This is the AI-driven platform that helps governments collect data and plan missions, among other tasks. The company typically secures multi-year contracts from governments that use Gotham, which leads to consistent double-digit sales growth and predictable cash flow.

However, the company’s future will likely depend on the success of its Foundry platform, the aforementioned “commercial” segment. Foundry is on a mission to help businesses make sense of their data so they can streamline their operations. The number of commercial customers has grown 53% over the past year (as of March 31, 2024), although this segment is still in LOT early stages of growth.

Although Palantir can deliver consistent double-digit sales growth and is irreplaceable at scale, a 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.

Nvidia: 22% implied weakness

A second AI stock that could face a future hit is the company that has benefited the most from the AI ​​revolution: Semiconductor Titan Nvidia (NVDA -1.91%).

While most Wall Street analysts can’t set their price targets high enough for this leading AI stock, Deutsche BankRoss Seymour set a $100 price target ($1,000 before Nvidia’s 10-for-1 stock split) in May. If Nvidia were to hit $100 per share, it would lose 22% of its current value, which translates to almost $700 billion in lost market cap.

In many ways, Nvidia’s expansion has been perfect. The company’s H100 graphics processing unit (GPU) has quickly become the must-have 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 computing edge in enterprise data centers.

However, history has consistently been a thorn in the side of businesses leading the next big revolutions. Since the advent of the Internet, there hasn’t been a buzzing innovation, technology, or trend that avoided a bubble in its infancy. Investors usually overestimate the adoption and growth potential of new innovations and technologies, not giving them time to mature. Artificial intelligence seems unlikely to be an exception to this unwritten rule.

Nvidia’s fiscal second quarter adjusted gross margin forecast of 75.5% (+/- 50 basis points) may also be an ominous warning. While an adjusted gross margin of 75.5% is still good above its historical rate, it represents a decline of 235 to 335 basis points from the next quarter. Putting two and two together suggests that competitive pressures have entered the picture.

External competitors are releasing 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 driving Nvidia’s hot adjusted gross margin looks set to fade — and that’s potentially bad news for investors.

Tesla: 91% implied decline

However, the potential disaster du jour among AI stocks is the world’s most valuable electric vehicle (EV) maker. Tesla (TSLA 2.08%). The company’s Full Self-Driving Software (FSD), which uses a network of cameras and ultrasonic sensors to avoid obstacles, is a perfect example of how Tesla incorporates AI into its EVs.

In mid-April, longtime Tesla bear Gordon Johnson of GLJ Research lowered his uber-specific price target on Tesla to $22.86 a share. Historically, Johnson has arrived at his price targets by placing a multiple of 15 on his estimate of future earnings for the company and applying a discount rate of 9% to the current price.

It cannot be denied that Tesla has done what has been impossible in the automotive industry for more than half a century. CEO Elon Musk successfully built the company from the ground up to mass production and has delivered four consecutive years of generally accepted accounting principles (GAAP) earnings. But the praise ends there.

Over the past 18 months, Tesla has reduced the selling price for its fleet of electric vehicles on more than half a dozen occasions. With first mover advantages waning and competition increasing, Musk has had no choice but to become more price competitive. The end result has been a sharp reduction in the company’s operating margin, a shift to a free cash outflow during the first quarter, and a large increase in the company’s EV inventory.

Additionally, Tesla’s efforts to become more than a car company have fallen flat. Although it has a handful of small wins under its belt, the growth rate for Tesla’s Energy Generation and Storage segment has slowed significantly, while the gross margin for Services is in the low single digits. As much as investors like to pretend that Tesla is an energy or technology company, most of its sales and profits still come from its already struggling and cyclical EV operations.

The other punishing factor for Tesla is the list of promises and innovations from Musk that have failed to take shape. After a full decade of promising Level 5 autonomy for its company’s EVs, Tesla’s FSD hasn’t shied away from Level 2 autonomy. Moreover, the Cybertruck has been an early-stage failure, with traction numerous and subpar deliveries.

Tesla is an auto stock with contracting margins and declining EV shipments that trades at a premium to even the top AI stocks. While a 91% drop might be a bit extreme, I’d have to agree with Gordon Johnson on this one MEANINGFUL weakness seems likely.