3 Leading AI Stocks That Could Drop Up to 91%, According to Selected Wall Street Analysts

For the past 30 years, Wall Street and the investment community have been waiting for a game-changing innovation or technology that could rival or surpass what the Internet did for corporate America. The rise of artificial intelligence may be just the ticket.

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

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Determining just how big the AI ​​revolution will be is up to interpretation and imagination. But according to a lofty estimate from analysts at PricewaterhouseCoopers, AI has the potential to add $15.7 trillion to the global economy by 2030. PwC arrived at this conclusion by extrapolating $6.6 trillion from increased productivity, with the remaining $9.1 trillion aided by benefits from consumption.

The huge dollar figures are not lost on Wall Street’s brightest minds. Most Wall Street institutions and analysts have set high growth expectations and sky-high price targets for the market-leading AI stocks.

But there are exceptions.

Based on the low price targets set by select Wall Street analysts, the following three leading AI stocks could fall by as much as 91%.

Palantir Technologies: Expected 65% Drop

The first AI stock that could be moved to storage, according to one Wall Street analyst, is data mining specialist Palantir Technologies (Belter 5.34%).

While one analyst believes Palantir still offers a 35% upside from its July 3 closing price, RBC Capital’s Rishi Galoria thinks the stock is worth $9. If that prediction holds true, one of the hottest AI stocks will be down 65%!

While Galoria, a major investor in Palantir, acknowledges that its operating results have been strong, a May 2024 memo points to concerns about the company’s commercial side. Specifically, Galoria points to revenue pulled from special purpose acquisition companies (SPACs) that have struck deals with Palantir. How sustainable or recurring that revenue is is anyone’s guess.

While Galoria’s concerns are justified — most SPACs have been disasters for investors — Palantir brings identifiable competitive advantages to the table that are clearly Do It deserves some distinction. For example, no other company can replicate the breadth of services Palantir offers on such a large scale.

Palantir’s main operating segment has long been Gotham. This is the AI-powered platform that helps governments collect data and plan missions, among other tasks. The company typically wins multi-year contracts from governments using Gotham, resulting in sustained double-digit sales growth and predictable cash flow.

However, the company’s future is likely to depend on the success of Foundry, the aforementioned “commercial” segment. Foundry is tasked with helping businesses understand their data so they can streamline their operations. The number of commercial customers has increased by 53% over the past year (through March 31, 2024), although this segment is still in its early stages. very Early stages of growth.

Although Palantir is capable of delivering sustained double-digit sales growth and is a widely held company, its forward price-to-earnings (P/E) ratio of 65 and price-to-sales ratio of 25 (based on the past 12 months of sales) are tough pills to swallow in an already expensive stock market.

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NVIDIA: Expected 22% drop

The second AI stock that could take a hit is the company that has benefited the most from the AI ​​revolution: semiconductor giant Nvidia (NVDA -1.91%).

While most Wall Street analysts can’t set their price targets high enough for this AI-leading stock, German BankNvidia CEO Ross Seymour set a price target of $100 ($1,000 before Nvidia’s 10-for-1 stock split) in May. If Nvidia hits $100 per share, it would lose 22% of its current value, which would mean losing about $700 billion in market value.

In many ways, Nvidia’s expansion has been flawless. The company’s H100 GPU has quickly become the go-to chip for AI-powered data centers. Last year, Nvidia GPUs accounted for 98 percent of the 3.85 million AI GPUs shipped, according to TechInsights. And with the next-generation Blackwell GPU architecture set to launch in the latter half of this year, Nvidia should have no problem maintaining its edge in enterprise data center computing.

But history has been a thorn in the side of the companies leading the next great revolutions. Since the advent of the internet, no successful innovation, technology, or trend has avoided an early bubble. Investors tend to overestimate the uptake and growth of new innovations and technologies, and don’t give them enough time to mature. AI seems unlikely to be an exception to this unwritten rule.

Nvidia’s fiscal Q2 adjusted gross margin forecast of 75.5% (+/- 50 bps) may be an ominous warning. While the 75.5% adjusted gross margin is still Good This is above historical average, and represents a decline of 235 to 335 basis points compared to the previous quarter. Putting these two numbers together, competitive pressures have entered the picture.

Outside competitors are rolling out or ramping up production of AI-powered GPUs in the second half of the year, while Nvidia’s four largest customers by net sales are all developing their own AI-accelerating chips for their data centers. The dearth of GPUs that fuel Nvidia’s hot adjusted profit margins appears to be dwindling — and that could be bad news for investors.

Tesla: Expected 91% drop

However, the potential disaster today Among AI stocks, the world’s most valuable electric car maker Tesla (Tesla 2.08%)The company’s Full Self-Driving (FSD) software, which uses a network of cameras and ultrasonic sensors to avoid obstacles, is a perfect example of how Tesla is integrating AI into its electric cars.

In mid-April, Gordon Johnson of GLJ Research, a veteran Tesla investor, cut his very own price target on Tesla to $22.86 per share. Historically, Johnson has arrived at his price targets by putting a multiple of 15 on his estimates of next year’s earnings for the company and applying a 9% discount rate to the current price.

There’s no doubt that Tesla has done what the auto industry has been unable to do for more than half a century. CEO Elon Musk has built the company from scratch to mass production, and the company has been profitable for four years in a row according to generally accepted accounting principles. But the praise ends there.

Over the past 18 months, Tesla has cut the selling price of its electric vehicle fleet on more than a half-dozen occasions. With its first-mover advantage eroded and competition mounting, Musk had no choice but to become more competitive on price. The end result was a sharp decline in the company’s operating margin, a return to free cash flow in the first quarter, and a significant increase in the company’s EV inventory.

Moreover, Tesla’s efforts to become more than just a car company have largely failed. While it has had a handful of small victories, Tesla’s energy generation and storage business has grown at a rapid clip, while its services gross margin has bottomed out. As much as investors want to pretend Tesla is an energy or technology company, the bulk of its sales and profits still come from its now-troubled and cyclical electric-vehicle operations.

Another deadly factor for Tesla is the list of promises and innovations that Musk has made that have failed to materialize. After a decade of promising Level 5 autonomy for his company’s electric vehicles, Tesla’s self-driving systems have yet to budge beyond Level 2. Moreover, the Cybertruck was an early failure, with multiple recalls and substandard deliveries.

Tesla is an auto stock with shrinking margins and declining EV deliveries, and it’s trading at a premium to even the top AI stocks. While the 91% drop may be a bit extreme, I agree with Gordon Johnson that prominent The downside seems likely.