Over the last two years, there hasn’t been a bigger Wall Street catalyst or buzzier trend than the rise of artificial intelligence (AI). The ability for AI-driven software and systems to become more efficient at their assigned tasks, as well as evolve to learn new skills over time, gives this game-changing technology a virtually limitless ceiling.
Despite an awe-inspiring addressable market of $15.7 trillion by 2030, based on estimates from PwC in Sizing the Prize, not all Wall Street analysts are necessarily bullish on the companies leading the AI charge. Keeping in mind that analyst price targets are fluid and often reactive rather than proactive, two seemingly unstoppable AI stocks can plunge by up to 94% in 2025, based on the price targets of select Wall Street analysts.
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Image source: Getty Images.
Although graphics processing unit (GPU) company Nvidia typically hogs the spotlight, there’s been perhaps no hotter AI stock on the planet in recent months than cloud-based data-mining specialist Palantir Technologies(NASDAQ: PLTR).
Shares of Palantir are up 343% this year, as of the closing bell on Dec. 6, and 980% over the trailing-two-year period. These outsized returns are a function of its AI-driven Gotham platform and AI- and machine learning-powered Foundry platform, being unique at scale.
Gotham is a service that federal governments use for mission planning and execution, as well as gathering data. Since these contracts typically stretch for four or five years and are with the U.S. government and its immediate allies, Palantir is able to generate predictable operating cash flow, with little concerns about being paid.
Meanwhile, Foundry is geared at helping businesses better understand their data in order to streamline their operations and improve profitability. This segment is still very early in its expansion, with Foundry’s commercial customer count rocketing higher by 51% to 498 during the September-ended quarter from the prior-year period.
Yet in spite of this seemingly perfect positioning for Palantir, RBC Capital analyst Rishi Jaluria believes shares of the company are worth (drum roll) $9, which would represent an astounding 88% decline from where shares closed on Dec. 6. Said Jaluria in a recent investor note,
We cannot rationalize why Palantir is the most expensive name in software… Absent a substantial beat-and-raise quarter elevating the near-term growth trajectory, valuation seems unsustainable.
Without question, valuation is the biggest worry with Palantir. Based on Wall Street’s consensus sales forecast of $3.47 billion for 2025, it’s 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., prior to the dotcom bubble). Palantir’s price-to-sales multiple is well beyond historic bubble territory.
The other issue for Palantir is that there’s a natural ceiling built into its profitable Gotham segment. Although it’s generating ample revenue from the U.S. government and its immediate allies, most global governments aren’t going to have access to this AI-driven platform, which limits its long-term appeal.
While Palantir has a seemingly safe moat, its nearly parabolic climb is likely unsustainable.
The Model 3 is Tesla’s top-selling sedan. Image source: Tesla.
The other artificial intelligence stock that at least one Wall Street analyst believes will plunge in the new year is electric-vehicle (EV) manufacturer Tesla(NASDAQ: TSLA).
Since Donald Trump won his bid for reelection last month, Tesla stock has been burning rubber to the upside. CEO Elon Musk’s ties to the president-elect are being viewed as a positive for Tesla. With Trump in the Oval Office, there’s the possibility of self-driving regulations being eased, which may clear a path for Tesla to fulfill its ambitious plan to flood the roads with robotaxis in the coming years. AI plays a key role in Tesla’s full self-driving technology.
Tesla bulls are also excited about the company’s continued push into energy products. Energy generation and storage revenue surged 52% in the third quarter to $2.38 billion from the prior-year period, with this segment offering the prospect of juicier margins than selling EVs.
And let’s not forget Tesla’s biggest competitive edge: its proven profitability. Tesla is closing in on its fifth consecutive year of generally accepted accounting principles (GAAP) profit. Meanwhile, the EV segments for legacy automakers and most up-and-coming EV businesses haven’t even patched together a single quarter of GAAP profits.
But according to GLJ Research’s Gordon Johnson, who’s been a longtime Tesla bear, North America’s leading EV stock is headed for a breakdown. Johnson’s very specific price target for Tesla is $24.86 per share, which is arrived at by placing a forward-earnings multiple of 15 on the stock, as well as a 9% discount rate to the current share price. If Johnson were accurate, Tesla shares would plummet by 94% in 2025.
Though Johnson has been critical of the safety of Tesla’s EVs and its accounting practices in the past, there are three other reasons why the company’s current share price of $389.22 is unjustifiable.
To begin with, competition has picked up in a big way in the EV arena and made Tesla’s once-mighty vehicle margins look pedestrian. Since 2023 began, Tesla has undertaken more than a half-dozen sweeping price cuts for its fleet in order to spur demand and keep inventory levels from rising. Despite these aggressive cuts, global inventory has still climbed and its operating margin has plunged. Paying a multiple of 119 times forward-year earnings for an auto stock whose margins aren’t higher than legacy automakers doesn’t make any sense.
Secondly, 51% of Tesla’s pre-tax income this year has come from unsustainable sources, which includes automotive regulatory credits and interest income on its cash. Investors would expect a company trading at a notable valuation premium to be generating its profit from its operations. But in reality, a slight majority of Tesla’s profit comes from unsustainable sources.
The third issue for Tesla is that Elon Musk has a poor track record of meeting expectations. Investors have baked Musk’s promises into the company’s valuation, but he’s regularly failed to deliver. For instance, he’s been promising Level 5 full self-driving is “one year away” for over a decade. Backing Musk’s failed promises out of the equation would rapidly deflate Tesla’s share price.
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Sean Williams has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia, Palantir Technologies, and Tesla. The Motley Fool has a disclosure policy.
