For the better part of the last two years, no trend has captivated the attention of professional and everyday investors more than the rise of artificial intelligence (AI).
With AI, software and systems are given the ability to make decisions, reason, and evolve, all without the aid of human intervention. Although this technology is still in its very early stages of evolution, it offers utility in most industries around the globe and, according to the analysts at PwC in Sizing the Prize, can boost worldwide gross domestic product by 26% come 2030.
Image source: Getty Images.
The eye-popping addressable market presented by AI hasn’t been lost on Wall Street or analysts. Most financial institutions expect market-leading AI stocks to push higher — but there are exceptions.
Based on the low-water price targets provided by a pair of Wall Street analysts, two of the hottest artificial intelligence stocks on the planet can plunge by up to 94%!
The first AI stock that could fall off the proverbial cliff, based on the prognostication of a lone Wall Street analyst, is data-mining specialist Palantir Technologies(NASDAQ: PLTR). Shares of Palantir have catapulted higher by more than 1,500% since 2023 began.
Despite this incredible outperformance, RBC Capital analyst Rishi Jaluria believes Palantir stock is headed to $40, which would represent a decline of 61% from where shares closed on Feb. 4. Interestingly enough, Jaluria raised his firms’ price target to $40 on Feb. 4 from just $11 per share following the release of Palantir’s fourth-quarter results and 2025 sales guidance (both of which blew past consensus estimates).
Jaluria’s continued pessimism for Palantir has to do with “concerns about the runway for growth and product differentiation,” as well as “shares trading at a premium multiple,” per his note to investors.
On one hand, Palantir’s competitive advantages have been on full display. There isn’t a one-for-one replacement for its AI-driven Gotham platform that assists federal governments with planning and executing missions, or its machine learning-powered Foundry platform, which helps businesses better understand their data. This has led to predictable operating cash flow, recurring profits, and multiyear contracts.
On the other hand, there are reasons to believe Jaluria’s downside price target of $40 isn’t just a pipe dream.
For starters, the company’s primary profit driver (Gotham) has a built-in ceiling that will, in all likelihood, limit its long-term growth runway. Since Gotham’s AI-inspired platform can only be used by the U.S. and its allies, there’s a limited pool of potential customers. Even with an uptick in possible use cases under the Trump administration, the ceiling for Gotham is tangible.
Secondly, every game-changing innovation since (and including) the advent of the internet three decades ago has endured a bubble-bursting event. This is to say that investors have consistently overestimated how quickly a new technology/innovation would be adopted and gain mainstream utility. Although Palantir’s contract-based backlog would somewhat soften the blow if the AI bubble were to burst, emotion-driven investing wouldn’t make it immune.
The third issue Jaluria touches on that’s absolutely a historic concern is Palantir’s “premium multiple.” Whereas a number of market-leading businesses have been stopped in their tracks at a price-to-sales ratio of roughly 30 to 40 over the last three decades, Palantir’s stock is now trading at a whopping 83 times sales immediately following its fourth-quarter operating results. This level of valuation premium doesn’t appear sustainable.
AI plays a key role in the safety aspect of Tesla EVs. Image source: Tesla.
The other artificial intelligence stock that can plummet, based on the forecast of one longtime bearish analyst, is electric-vehicle (EV) maker Tesla(NASDAQ: TSLA). AI is integral to the full self-driving (FSD) software Tesla’s EVs employ to navigate public roadways and avoid other cars, pedestrians, and obstacles.
According to GLJ Research founder and analyst Gordon Johnson, North America’s leading EV maker is headed for $24.86 per share, which would equate to a plunge of 94% from where its stock ended on Feb. 4. This eerily specific price target from Johnson is derived from setting a 15X forward earnings multiple on Tesla and working backwards with a 9% discount rate.
Similar to Palantir, Tesla has ridden its first-mover/competitive advantages to jaw-dropping gains. It’s one of a very small number of EV makers that’s generating a profit, and became the first auto company in more than a half-century to successfully build itself from the ground up to mass production.
Additionally, Tesla is attempting to become more than just an auto stock. It’s been steadily expanding its energy and storage segment, which can help reduce the demand-driven ebbs-and-flows experienced by automakers.
Johnson’s persistently bearish thesis on Tesla has to do with expected weakness in the company’s margins due to discounting, as well as its ongoing reliance on unsustainable sources of income.
Beginning in 2023, Tesla began discounting its fleet of EVs (3, S, X, and Y), leading to more than a half-dozen price cuts spanning more than a year. A steady uptick in competition, coupled with weakening demand for EVs, has weighed heavily on the company’s vehicle margin. Though inventory levels have begun to decline, largely due to steep price cuts, they’re still up noticeably from a few years ago.
Johnson also homed in on Tesla’s automotive regulatory credits as an issue. More than half of Tesla’s pre-tax income comes from a combination of selling tax credits to other automakers, interest income on its cash, and positive adjustments on the value of its digital assets. Theses are unsustainable and/or non-innovative income sources. Instead of EVs and energy storage driving profits, Tesla’s bottom line has been boosted by factors that have nothing to do with its business.
But perhaps the biggest worry of all for Tesla and its shareholders is CEO Elon Musk. Even though Musk has overseen the rollout of new EVs, energy storage products, and multiple versions of FSD, he’s failed to deliver on countless promises. Specifically, he’s been alluding to FSD reaching Level 5 autonomy “next year” for more than a decade. If Musk’s unfulfilled promises were backed out of Tesla’s valuation, Gordon Johnson’s exceptionally low price target wouldn’t seem that far-fetched.
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Sean Williams has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Palantir Technologies and Tesla. The Motley Fool has a disclosure policy.
2 of the Hottest Artificial Intelligence (AI) Stocks on the Planet Can Plunge Up to 94%, According to Select Wall Street Analysts was originally published by The Motley Fool
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