Enthusiasm for artificial intelligence (AI) has driven the S&P 500 (SNPINDEX: ^GSPC) towards dozens of records in 2024. Palantir Technologies (NYSE: PLTR) and Fire arms (NASDAQ: ARM) have benefited greatly from this momentum, posting year-to-date gains of 61% and 145%, respectively.
Some Wall Street analysts, however, believe the stock has gotten ahead of itself. Their 12-month price targets imply a substantial downside for shareholders.
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Rishi Jaluria of RBC Capital Markets set a price target of $9 per share for Palantir, implying a 67% downside from the current share price of $27.
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Javier Correonero at The Morning Star set Arm a price target of $66 per share, implying a 64% downside from its current share price of $182.
Should Investors Sell These High-Flying AI Stocks?
Palantir Technologies: 67% implied decline
Palantir offers four core software platforms. Gotham and Foundry enable customers to integrate data, develop artificial intelligence (AI) and machine learning (ML) models, and build analytics applications to improve decision making. Apollo is a delivery system that updates both platforms, and AIP (Artificial Intelligence Platform) brings support for generative AI to Gotham and Foundry.
Analysts have mixed views on Palantir. In the bullish camp, Forrester Research The company is ranked as a leader among AI/ML platform providers, and Dresner Advisory Services ranks it as a leader in ModelOps, which deals with the development, deployment, and optimization of AI/ML models. Last year, Dan Ives of Wedbush Securities called Palantir “probably the best pure AI name.”
In the bear camp, Gartner Palantir ranks below most of its peers in data integration tools, and the consultancy didn’t even mention Palantir in a recent report on data science and ML platforms. Last year, RBC Capital’s Rishi Jaluria said that conversations with industry experts and company employees suggest that Palantir “doesn’t seem to be something that’s really differentiated in generative AI.”
Palantir reported strong financial results for the first quarter. Revenue rose 21% to $634 million and non-GAAP earnings rose 60% to $0.08 per diluted share. Management noted “unprecedented demand driven by AIP momentum.” Still, the company is forecasting 20% revenue growth for the full year, implying a slight deceleration in the coming quarters.
Wall Street expects adjusted earnings per share to grow 22% annually through 2026. That estimate makes the current valuation of 99 times adjusted earnings very expensive. I doubt Palantir shares will plunge to $9 as Rishi Jaluria predicts, but investors should consider reducing their position here.
Arm Holdings: 64% implied decline
Arm designs central processing unit (CPU) architectures that it licenses to customers such as Apple, AmazonAnd NvidiaThese companies use Arm-based products to develop their own chips and systems. They have the option of building chips with custom cores (the processing engines of CPUs) or buying off-the-shelf cores from Arm. The latter option outsources an even greater portion of chip R&D spending.
Apple’s M-series chips are an example of Arm-based processors with custom cores. But Amazon’s Graviton processors and Nvidia’s Grace processors feature Arm Neoverse cores out of the box, optimized for cloud computing and artificial intelligence. By comparison, Arm’s Cortex-series cores are optimized for mobile and IoT devices.
Every processor has an instruction set architecture that defines how the hardware interacts with the software. Arm architectures are known for their low power consumption, and Arm-based chips are nearly ubiquitous in devices where power efficiency is critical. For example, its technology is found in 99% of smartphones and holds 60% of the market share in other mobile devices.
Meanwhile, the x86 architectures used by Intel And Advanced microsystems Microchips have traditionally been associated with superior computing performance. This advantage has allowed these chipmakers to dominate the personal computer (PC) and data center markets.
Companies on both sides have tried to expand their influence, but Arm has had more success. Intel and AMD have made little progress in mobile devices, but Arm gained three market share points in data centers between 2020 and 2023, according to CFRA analysts. Additionally, CEO Rene Haas recently predicted that Arm will hold 50% of the PC market share by 2029, up from 17% in 2024.
Arm had a strong showing in its fiscal 2024 fourth quarter (ended March 31). Revenue rose 47% to $928 million, and non-GAAP net income improved to $0.36 per diluted share, up from $0.02 per diluted share last year. But management gave guidance implying 22% revenue growth for fiscal 2025, a surprising deceleration given the theoretically high demand for AI chips.
Of course, this outlook could be nothing more than a cautionary tale from management, but there’s another issue that investors should consider. Wall Street expects Arm to grow its adjusted earnings per share by 27% per year through fiscal 2026. That forecast makes its current valuation of 144 times adjusted earnings outrageously expensive. Personally, I doubt Arm shares will fall 64%, but investors should consider reducing their positions on this front.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Trevor Jennewine has positions in Amazon, Nvidia, and Palantir Technologies. The Motley Fool has positions in and recommends Advanced Micro Devices, Amazon, Apple, Nvidia, and Palantir Technologies. The Motley Fool recommends Gartner and Intel and recommends the following options: long January 2025 $45 calls on Intel and short August 2024 $35 calls on Intel. The Motley Fool has a position in Amazon, Nvidia, and Palantir Technologies. disclosure policy.
2 Popular Artificial Intelligence (AI) Stocks to Sell Before They Plunge 64% and 67%, According to Some Wall Street Analysts was originally published by The Motley Fool