According to some Wall Street analysts, 2 popular artificial intelligence (AI) stocks will sell off before falling 64% and 67%.

Excitement about artificial intelligence (AI) has surged. S&P 500 (^GSPC 1.02%) Dozens of record highs in 2024. Palantir Technologies (PLTR 3.76%) And Arm Holdings (ARM 2.29%) The momentum has been substantial, with year-to-date gains of 61% and 145%, respectively.

However, some Wall Street analysts believe stocks have gotten ahead of themselves. Their 12-month price targets indicate considerable downside for shareholders.

• Rishi Jalorea at RBC Capital Markets has given Palantir a price target of $9 per share, implying a 67% downside to its current share price of $27.
• Javier Correonero at morning star Arm has set a price target of $66 per share, implying a 64% downside from its current share price of $182.

Should investors sell this high-flying AI stock?

Palantir Technologies: 67% implied downside

Palantir provides four primary software platforms. Gotham and Foundry let clients integrate data, develop artificial intelligence (AI) and machine learning (ML) models, and design analytics applications to improve decision-making. Apollo is a delivery system that updates both platforms, and brings AIP (Artificial Intelligence Platform) support for generative AI to Gotham and Foundry.

Analysts have mixed opinions about Palantir. In Bell Camp, Forrester Research ranks the company as a leader in AI/ML platform providers, and Dresner Advisory Services ranks it as a leader in ModelOps, the process of developing, deploying, and deploying AI/ML models. And it's about improving. Last year, Dan Ives at Wedbush Securities said Palantir was “probably the best pure-play AI name.”

in bear camp, Gartner ranks Palantir at the bottom of data integration tools, and the consultancy didn't even mention Palantir in a recent report on data science and ML platforms. Last year, Rishi Jalorea at RBC Capital said that conversations with industry experts and company employees showed that Palantir “doesn't really see a difference when it comes to creative AI.”

Palantir reported good financial results in the first quarter. Revenue rose 21% to $634 million and non-GAAP earnings rose 60% to $0.08. Management noted “unprecedented demand driven by AIP momentum.” Nevertheless, the company guided for full-year revenue growth of 20%, implying a slight decline in the coming quarters.

Wall Street expects adjusted earnings per share to grow 22 percent annually through 2026. I doubt Palantir shares will fall to $9 as Rishi Jalorea expects, but investors should consider reducing their positions here.

Arm Holdings: 64% implied downside

Arm designs central processing unit (CPU) architectures that it favors clients. apple, AmazonAnd Nvidia. Those companies use arm-based products to develop their chips and systems. They have the option of building chips with custom cores (the processing engine in the CPU) or buying off-the-shelf cores from Arm. The latter option outsources an even larger portion of chip-related R&D costs.

Apple's M-series chips are an example of an ARM-based CPU with a custom core. But Amazon's Graviton processors and Nvidia's Grace CPUs have off-the-shelf ArmNever cores, suitable for cloud computing and artificial intelligence. By comparison, the Cortex-series cores from Arm are optimized for mobile and IoT devices.

Each CPU has an instruction set architecture that defines how the hardware interacts with the software. ARM architectures are known for their low power consumption, and ARM-based chips are virtually ubiquitous in devices where power efficiency is important. For example, its technology is present in 99% of smartphones, and it has a 60% market share in other mobile devices.

Meanwhile, used by x86 architectures Intel And Advanced Micro Devices have traditionally been associated with high computational efficiency. This edge has allowed these chipmakers to dominate the personal computer (PC) and data center markets.

Companies on both sides have tried to increase their influence, but Arm has been more successful. Intel and AMD have made little progress in mobile devices, but Arm will gain three points of data center market share between 2020 and 2023, according to CFRA analysts. Additionally, CEO Rene Haas recently predicted that Arm will hold a 50 percent PC market share by 2029, up from 17 percent in 2024.

The arm looked strong in the fourth quarter of fiscal 2024 (ended March 31). Revenue rose 47% to $928 million and non-GAAP net income was $0.36 per diluted share, up from $0.02 per diluted share last year. But management provided guidance indicating revenue growth of 22 percent in fiscal 2025, a surprising decline given the theoretically high demand for AI chips.

Of course, this approach may be nothing more than caution on the part of management, but investors should consider another issue. Wall Street expects Arm's adjusted earnings per share to grow 27 percent annually through fiscal 2026. Personally, I doubt Arm shares will fall 64%, but investors should consider trimming their positions here.