Low-water price targets from five Wall Street analysts predict big downside for many top-performing artificial intelligence (AI) stocks.
Since the advent of the Internet, no next big thing has been a hotter investment trend than artificial intelligence (AI).
When discussing “AI” I’m referring to software and systems handling tasks that are typically overseen by humans. Machine learning gives software and systems the ability to learn and evolve without human intervention, which can make these systems more adept at their tasks over time.
The utility of AI cannot be overstated. Almost every sector and industry can benefit from its use, which is probably why analysts at PwC believe that artificial intelligence will add $15.7 trillion to the global economy by 2030.
Image source: Getty Images.
While most institutional managers and Wall Street analysts see AI and companies deploying AI infrastructure and software appropriately, the boom is not universal. Based on the low-water price targets issued by a select group of Wall Street analysts, the following five AI stocks could drop as much as 86%!
Nvidia: Downside of 30%
The first AI stock to fall after a terrible run is none other than the infrastructure backbone of the AI revolution. Nvidia (NVDA -0.99%). In February, DA Davidson analyst Gil Loria raised his and his firm’s price target on Nvidia to $620 from $410. Despite this epic rise, it means the third-largest public company in the U.S. by market cap will shed 30% of its value, based on where it closed on April 5.
While Nvidia’s A100 and H100 graphics processing units (GPUs) have been a strong business choice for AI-accelerated data centers, there are many reasons to believe that Nvidia’s stock may be in a bubble.
For starters, Nvidia’s top four customers, which account for about 40% of its sales, are all developing their own AI GPUs. Even if these companies continue to rely on Nvidia’s GPUs as a complement to their in-house GPUs, future orders from these industry leaders are expected to decline.
To add to the above, Nvidia’s pricing power on its A100 and H100 GPUs is expected to suffer in the latter half of 2024. The bulk of its 217% increase in data center sales in fiscal year 2024 (ended January 28, 2024) was driven by GPU declines. As new competitors enter the fray and Nvidia ramps up its production, GPU shortages will diminish — as will the company’s pricing power.
What’s more, every next big thing in the last 30 years has tended to go through an early-stage bubble. Suffice it to say, I fully expect Loria’s price target to be met.
Super Microcomputer: Downside of 74%
Another artificial intelligence stock that could fall in the not-too-distant future if one Wall Street analyst is right is a server and storage solutions company. Super Microcomputer (SMCI -2.06%). Susquehanna senior equity research analyst Mehdi Hosseini stood by his $250 price target for Super Micro in an interview on CNBC just two months ago. This would mean that the supermicrocomputer is losing about three-quarters of its current value.
It’s understandable why investors have gone head-to-head for Super Micro. The company incorporates Nvidia’s advanced GPUs into its energy-efficient and highly customizable rack servers that are used in AI-accelerated data centers. The company’s sales are expected to double to north of $14 billion in 2024.
However, we’ve been here before with Super Micro. It was expected to be the biggest beneficiary of the cloud computing revolution of the late 2010s, but failed to maintain its sales momentum. This points to the fact that investors have a terrible habit of overestimating the adoption of new trends and innovations.
Supermicrocomputers also find themselves at the mercy of Nvidia. If the latter continues to deal with supply issues/shortages for its GPUs, Super Micro will fail to realize its full potential.
While a return to $250 may not be in the cards anytime soon, Super Microcomputer certainly has a lot to prove after its stock rallied 767 percent over the past year.
A Tesla Model S charging. Image Source: Tesla.
Tesla: Downside of 86 percent
Potential disaster du jour AI Stock is North America’s leading electric vehicle (EV) maker. Tesla (TSLA 4.90%). Gordon Johnson, CEO and founder of GLJ Research, believes Tesla will return to $23.53 per share, which would represent an 86% decline from where it closed on April 5.
On the one hand, Tesla has made history by becoming the first automotive company to build itself from the ground up to mass production in more than half a century. It is also the only EV pure play to be profitable repeatedly (for four consecutive years, till the end of 2023).
At the same time, Tesla is facing game-changing challenges as EV demand slows. The company cut the selling price of its four production models (3, S, X, and Y) on more than half a dozen occasions in 2023. The end result is more than half of Tesla’s operating margin since the end. by September 2022 (from 17.2% to 8.2%, by 31 December 2023).
Perhaps an even bigger problem is that Tesla has failed to become more than just a car company. Sales of its energy generation and storage segments have stagnated in recent quarters, while services are generating low single-digit gross margins. I will add that solar has been a money maker since the acquisition of SolarCity in 2016.
Despite being nothing more than a car company, Tesla is valued at around 60 times forecast earnings in 2024. With most auto stocks trading in the range of 6 to 8 times expected earnings per share (EPS), there’s absolutely reason to believe Tesla’s stock is upside.
Microstrategy: The downside of 85%
A fourth artificial intelligence stock that could absolutely crush if Wall Street’s most bearish analyst is right is the enterprise analytics software company. Micro strategy (Mstr 5.14%). last august, Jeffries Analyst Brent Thill defended his firm’s low-ball price target of $210 for MicroStrategy, which would mean an 85% drop from where shares closed last week.
One problem for MicroStrategy is that its AI-powered enterprise analytics software division stopped growing 10 years ago. Sales have fallen 14 percent overall since their peak.
But let’s face facts: MicroStrategy is best known for CEO Michael Siler’s strategy of issuing convertible debt and using the proceeds to make buyouts. Bitcoin (BTC -2.38%)The largest cryptocurrency by market cap. On March 19, Siler posted on X (the platform formerly known as Twitter) that his company had held 214,246 bitcoins — more than 1% of the final supply — for approx. At an average price of $35,160 per token.
With each bitcoin worth $67,600, as of this writing, MicroStrategy’s crypto stake is worth $14.5 billion. However, the company’s market cap currently stands at $24.4 billion. Accounting for the company’s marginally profitable (but non-growing) software business, as well as its growing debt pile, MicroStrategy is trading at about a 70% premium to the bitcoin it holds.
If investors want to buy bitcoin, a spot bitcoin exchange-traded fund (ETF) or a direct purchase of the cryptocurrency on an exchange would be one. Quite a bit A smarter move than buying into a micro-strategy, whose premium valuation at Bitcoin’s current price doesn’t make sense.
Palantir Technologies: Downside of 78%
A fifth AI stock that could sink, according to one Wall Street analyst, is a data mining company. Palantir Technologies (PLTR 0.17%). RBC Capital analyst Rishi Jalorea doesn’t believe Palantir’s commercial segment margins can grow at their current pace. That prompted Jaloria to recently reiterate his and his firms’ $5 price target on Palantir, implying a 78% downside.
There’s no question that Palantir stock is expensive. The company’s market cap of about $51 billion is closing this year at a multiple of 19 times forecast sales. It is valued at 70 times consensus EPS in 2024 despite declining sales.
But one thing Palantir has going for it that deserves a hefty premium is its immutability. No other company at scale comes close to the solutions it can provide. Palantir’s AI-powered Gotham platform helps governments collect data and plan military operations. Palantir’s winning contracts from the US government span several years and generate highly predictable cash flows.
Meanwhile, its Foundry platform is just getting off the ground and helping businesses make sense of their data so they can streamline their operations. While there are sales limitations with Gotham — namely, Palantir won’t offer access to its platform in certain countries (e.g., China) — Foundry has a theoretical development runway that stretches decades into the future. has happened
While it may take some time for Palantir to raise its current price, I don’t expect Jaloria to hit its low-water price target.