High-Flying AI Stocks May Drop by Over 20% in the Next Year, Wall Street Predicts
If analysts are correct, what rises might also fall. Artificial Intelligence (AI) seems to have the Midas touch, with nearly every sector it influences turning profitable. This is evident in the AI Stocks performance of leading AI chip and software companies.
However, similar to the unfortunate turn in the fabled king’s story, stocks that have been lucrative investments could face difficulties. Wall Street forecasts suggest these prominent AI stocks might decrease by more than 20% within the upcoming year.
Arm Holdings: The Excitement May Diminish
Arm Holdings (ARM 3.74%) has seen its stock more than double in the past year, with a significant portion of this growth occurring in February after the company exceeded fiscal 2024 third-quarter revenue and earnings expectations and issued positive sales forecasts.
AI is undeniably the key driver behind Arm’s success. CEO Rene Haas mentioned in the quarterly earnings call the company is experiencing strong momentum due to AI. Haas emphasized in a letter to shareholders that AI technology by Arm is utilized in a wide range from complex cloud applications to simple edge devices.
Haas’s claim is not an overstatement. Nvidia’s GH200 Grace Hopper Superchip and Alphabet’s Google Gemini Nano large language model (LLM), which powers Pixel 8 smartphones, both incorporate Arm’s technology. Additionally, companies like Samsung and Vivo have introduced new smartphones featuring Arm technology for generative AI applications.
Nonetheless, Wall Street analysts believe Arm’s growth might slow down. Their average 12-month price target for Arm is 25% lower than its current price, with the most pessimistic forecast suggesting a nearly 60% drop.
The primary concern is the company’s valuation, with Arm’s stock currently priced at a forward price-to-earnings ratio of 78x.
Palantir Technologies: A Controversial Leader in AI Software
AI chip stocks have seen significant gains, and AI software companies like Palantir Technologies (PLTR -2.63%) have also experienced substantial growth, with its stock price increasing nearly 50% in the past year.
Similar to Arm, Palantir’s stock surged this month following a positive quarterly report. Palantir exceeded revenue expectations for the fourth quarter and met earnings forecasts. The company predicts over 19% year-over-year revenue growth for 2024.
Palantir CEO Alex Karp noted in his annual letter to shareholders the “surging demand” for AI platforms, including LLMs. The introduction of Palantir’s Artificial Intelligence Platform (AIP) is expected to significantly contribute to the company’s growth.
Despite this positive outlook, Wall Street remains skeptical about the stock’s future, with the average price target indicating about a 20% downside. RBC Capital’s target is notably bleak, suggesting an almost 80% decrease from the current price.
Valuation concerns are again at the forefront, with Palantir’s stock trading at nearly 72 times expected earnings.
Should We Trust Wall Street’s Predictions on These AI Stocks?
It’s not advisable to entirely rely on Wall Street’s pessimistic forecasts for Arm and Palantir over the next year. The ongoing enthusiasm for AI could sustain the momentum of both stocks.
However, I concur with analysts on the issue of overvaluation. Currently, neither company’s growth justifies their high stock prices. Investors searching for promising AI stocks might find better options elsewhere.
