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Artificial intelligence (AI) is like King Midas. Almost everything it touches turns to gold. Look at the stock charts of many leaders in AI chips and software.
But just as the story of the legendary king took a turn for the worse, some of the stocks that were goldmines for investors may be facing tough times. According to Wall Street, these fast-rising AI stocks could fall more than 20% over the next 12 months.
Arm Holdings: The heat could fade
arm holdings (NASDAQ:ARM) The stock price has more than doubled in the past 12 months. Most of the big gains came in February after the chipmaker beat analysts’ expectations for fiscal 2024 third-quarter sales and profits and gave a positive sales outlook.
There’s no question that AI is a major source of Arm’s fortunes. CEO Rene Haas said on its quarterly conference call that the company is seeing “strong momentum and tailwinds from all areas of AI.” This is great news because, as Haas wrote to shareholders, “AI on Arm is everywhere, from the most complex AI cloud applications to the smallest edge devices.”
Haas wasn’t exaggerating. NvidiaThe GH200 Grace Hopper Super Chip uses Arm technology.that’s right alphabetGoogle Gemini Nano Large Language Model (LLM) running on Pixel 8 smartphones. Other companies like Samsung and Vivo are also announcing new smartphones that use Arm technology to run generative AI apps.
But many on Wall Street think the enthusiasm for Arm will die down soon. The company’s average 12-month price target is 25% below the current stock price. The most pessimistic analysts predict that Arm stock could fall nearly 60%.
Why such negativity? Ratings are the main reason. Arm’s stock currently trades at a forward price/earnings ratio of 78.
Palantir Technologies: A polarizing AI software leader
While AI chip stocks ranked among the biggest winners, several AI software stocks also delivered big gains. Palantir Technologies (NYSE:PLTR) is a good example, with its share price soaring nearly 50% over the past 12 months.
As with Arm, much of Palantir’s impressive earnings came this month after a strong quarterly update. Palantir beat consensus revenue estimates for the fourth quarter, but profits were only in line with expectations. Additionally, his full-year 2024 outlook for the company projects revenue growth of more than 19% year over year at the midpoint of the guidance range.
Palantir CEO Alex Karp said in his annual letter to shareholders that the company is seeing “soaring demand” for its AI platform, including LLM. The launch of Palantir’s Artificial Intelligence Platform (AIP) is a key growth driver for the company.
Despite this great news, Wall Street isn’t thrilled about the stock’s outlook. Palantir’s average price target reflects about 20% downside. red blood cells Capital is particularly pessimistic, with a price target nearly 80% below Palantir’s current share price.
Again, valuation is of primary concern to analysts. Palantir’s stock trades at nearly 72 times forward earnings.
Is Wall Street right about these AI stocks?
I wouldn’t bet on the firm that Wall Street’s less than rosy price targets for Arm and Palantir will be proven correct within the next year. Investor excitement about AI could maintain enough enthusiasm to keep both stocks going.
However, I agree with analysts who think the valuations of these stocks are frothy. In my view, neither currently has the growth needed to justify such a premium price. Investors looking for good AI stocks to buy will find better ones, I think.
Should you invest $1,000 in Arm Holdings right now?
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Alphabet executive Suzanne Frye is a member of The Motley Fool’s board of directors. Keith Speights holds a position at Alphabet. The Motley Fool has positions in and recommends Alphabet, Nvidia, and Palantir Technologies. The Motley Fool has a disclosure policy.
These fast-rising artificial intelligence (AI) stocks could fall more than 20% in the next 12 months, according to Wall Street Originally published by The Motley Fool
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