The artificial intelligence (AI) gold rush is in full swing. The technology-heavy Nasdaq Composite advanced 31% over the past year as investors piled into the market, hoping to strike it rich. Sentiment is still running hot, but it’s important to be choosy when buying stocks. Not every company will be a long-term winner, and not even the best company is a good investment at any price.
With that in mind, certain Wall Street analysts see substantial downside in two popular AI stocks, Tesla (NASDAQ: TSLA) and Palantir Technologies (NYSE: PLTR). Here’s what investors should know.
Tesla: JPMorgan Chase’s price target of $115 per share implies 29% downside
Ryan Brinkman at JPMorgan Chase reduced his revenue and earnings estimates for Tesla earlier this month when the company reported first-quarter deliveries, which missed expectations by a wide margin. Brinkman also lowered his year-end price target to $115 per share, which implies 29% downside from the current price of $161 per share.
Tesla has a demand problem. Global electric vehicle sales rose just 31% last year, a significant slowdown from 60% growth in the prior year, according to research company Rho Motion. Growing markets naturally lose momentum over time, but macroeconomic headwinds have been the causal factor in this case. Specifically, high interest rates are a major disincentive to big-ticket purchases like electric cars, especially when cheaper options exist.
Tesla has cut prices to compensate for ailing demand, but that dampened growth and dragged on margins. The company delivered a series of increasingly disappointing financial reports over the past year, culminating in a dismal fourth quarter. Revenue rose just 3% to $25.2 billion, and non-GAAP (adjusted) net income dropped 40% to $0.71 per diluted share. Management also warned that the vehicle volume growth rate could be much lower in 2024 as the company prepared to build its next-generation (low-cost) vehicle in 2025.
The situation was more dire than Wall Street anticipated. Tesla deliveries declined 8.5% to 386,810 vehicles in the first quarter, missing even the most bearish estimates. The company has not seen deliveries decline since the first quarter of 2020, and that was attributable to the COVID-19 pandemic. Worse yet, Tesla has canceled plans to build the low-cost electric car that could have expanded its addressable market, according to Reuters.
There is more bad news. Several executives have left Tesla in the past year, including former CFO Zach Kirkhorn, who had been discussed as a possible successor to CEO Elon Musk. The company also announced plans to lay off 10% of its global workforce earlier this week, a sign that demand among consumers may be worsening.
On the bright side, Tesla is doubling down on its artificial intelligence (AI) ambitions. Musk has said full self-driving (FSD) software will eventually be the primary source of profitability, and the company plans to unveil its robotaxi at an event on Aug. 8. That could be a positive inflection point if the company provides specific dates regarding the launch of an autonomous ride-hailing network. Or it could be a negative inflection point if the company fails to impress.
Investors should note that Brinkman is not the only analyst who sees substantial downside in Tesla. Colin Langan at Wells Fargo recently lowered his 12-month price target to $120 per share, which implies 25% downside. “We expect volume to disappoint as price cuts are having a diminishing impact on demand,” he explained in a note to clients.
Here’s the bottom line: Tesla is still the global leader in battery electric vehicle sales, but the company is struggling with demand and churn issues that could hinder growth for the foreseeable future. Consequently, the stock could certainly move lower in the near term, especially if the company fails to reassure investors when it reports first-quarter earnings on April 23. Personally, I plan to sit tight right now, neither buying nor selling, until management provides more visibility regarding its product roadmap.
Palantir Technologies: RBC Capital’s price target of $5 per share implies 77% downside
In late 2022, Rishi Jaluria at RBC Capital lowered his price target on Palantir Technologies to $5 per share following lackluster financial results. He stuck with that estimate, which implies 77% downside from the current price of $22 per share, even as the stock soared 150% over the past year. Those gains were driven by excitement about Palantir’s role in the artificial intelligence value chain and, to a lesser extent, its recent win of the U.S. Army Titan contract.
Jaluria has expressed concern about Palantir’s ability to monetize generative AI despite the company touting unprecedented demand for AIP (Artificial Intelligence Platform), a new product that brings support for large language models to its Foundry platform. To elaborate, Palantir sells software that lets clients manage and incorporate data and machine learning (ML) models into applications that improve decision-making. Its AIP product further empowers clients by adding generative AI capabilities to Foundry.
Jaluria also attributes his bearish outlook to valuation. This is a company trading at 25 times revenue and growing at less than 20%, which is unheard of in software,” he told Yahoo Finance during a March interview. Those numbers have since changed, but the point is still valid. Wall Street expects Palantir to grow sales at 21% annually over the next five years, which makes its current valuation of 22.6 times sales look expensive, especially when the two-year average is 13.7 times sales.
However, Jaluria may be overly pessimistic where artificial intelligence is concerned. Dan Ives at Wedbush Securities recently called Palantir the launchpad for AI, and he has previously said the company is “probably the best pure-play AI name.” Additionally, Forrester Research has recognized Palantir as a leader among AI/ML platform vendors
Here’s the bottom line: I think Palantir will benefit as AI spending increases, but the stock trades at a pricey valuation compared to the sales growth forecasted by Wall Street. That could lead to a substantial pullback if the company misses expectations when it issues its first-quarter report on May 6. For that reason, I think investors should avoid buying this stock until it trades at a more reasonable price. It may also be prudent to trim overly large positions right now, given the recent run-up.
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JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Wells Fargo is an advertising partner of The Ascent, a Motley Fool company. Trevor Jennewine has positions in Palantir Technologies and Tesla. The Motley Fool has positions in and recommends JPMorgan Chase, Palantir Technologies, and Tesla. The Motley Fool has a disclosure policy.
2 Popular Artificial Intelligence (AI) Stocks to Sell Before They Drop 29% and 77%, According to Certain Wall Street Analysts was originally published by The Motley Fool
