Artificial intelligence (AI) has undeniably been a dominant force on Wall Street, captivating investors with its transformative potential. The projected market size of $15.7 trillion by 2030, as estimated by PwC, underscores the immense opportunities within this sector. However, despite the widespread enthusiasm, not all analysts share the same optimistic outlook for leading AI companies. While price targets are subject to change, some analysts predict a significant downturn for two seemingly unstoppable AI stocks: Palantir Technologies and Tesla. Could these industry giants potentially face a plunge of up to 94% by 2025? Let’s delve into the arguments presented by Wall Street analysts.
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The Model 3 is Tesla’s top-selling sedan. Image source: Tesla.
Palantir Technologies: An 88% Downside Potential?
While Nvidia often steals the spotlight, Palantir Technologies, a cloud-based data-mining specialist, has emerged as a prominent player in the AI landscape. The company’s stock has soared by a remarkable 343% this year and 980% over the past two years, driven by the unique capabilities of its AI-powered platforms, Gotham and Foundry.
Gotham, utilized by federal governments for mission planning and data gathering, provides Palantir with predictable cash flow due to its long-term contracts with the U.S. government and its allies. Foundry, designed to optimize business operations and enhance profitability through data analysis, witnessed a 51% surge in commercial customer count in the recent quarter.
Despite this seemingly strong positioning, RBC Capital analyst Rishi Jaluria has assigned a $9 price target to Palantir, implying a potential 88% decline from its current price. Jaluria questions the company’s valuation, considering it unsustainable in the absence of substantial growth acceleration. With a projected 2025 revenue of $3.47 billion, Palantir’s valuation stands at 50 times next year’s sales, exceeding historical bubble territory.
Furthermore, concerns exist regarding the limited growth potential of the Gotham segment due to restricted access for most global governments. While Palantir possesses a seemingly secure competitive advantage, its rapid ascent raises concerns about sustainability.
Tesla: Facing a Potential 94% Plunge?
Tesla, the electric vehicle (EV) manufacturer renowned for its AI-driven full self-driving technology, has also attracted attention from analysts predicting a significant decline. Gordon Johnson of GLJ Research, a long-time Tesla bear, has set a price target of $24.86 per share, suggesting a staggering 94% drop by 2025. This target is based on a forward-earnings multiple of 15 and a 9% discount rate.
Image source: Getty Images.
While acknowledging Tesla’s advancements in energy products and its consistent profitability in the EV market, Johnson highlights three key concerns:
Firstly, intensified competition in the EV sector has eroded Tesla’s once-substantial vehicle margins. Despite implementing numerous price cuts, global inventory levels have risen, and operating margins have declined. A price-to-earnings ratio of 119 for an auto stock with diminishing margins appears unjustified.
Secondly, over half of Tesla’s pre-tax income stems from unsustainable sources like regulatory credits and interest income, raising questions about the company’s core operational profitability.
Thirdly, Elon Musk’s history of unmet expectations, particularly regarding full self-driving technology, casts doubt on the company’s lofty valuation. Removing the premium associated with these unfulfilled promises could significantly deflate Tesla’s share price.
Conclusion: Navigating Uncertainty in the AI Landscape
While AI holds immense promise, the starkly contrasting views on Palantir and Tesla highlight the inherent uncertainties within this rapidly evolving sector. Investors must carefully consider the factors contributing to these divergent perspectives, including valuation concerns, competitive pressures, and the sustainability of profit sources. Thorough due diligence and a balanced approach are crucial for navigating the complexities of the AI market and making informed investment decisions.
