No next-big-thing investment trend has arguably been hotter because the appearance of the online than artificial intelligence (AI) is directly.
When discussing “AI,” I’m referring to software and systems handling tasks that can normally be overseen by humans. Machine learning gives software and systems the facility to learn and evolve without human intervention, which could make these systems more proficient at their tasks over time.
The utility of AI can’t be overstated enough. Almost every sector and industry can cash in on its use, which may be why the analysts at PwC imagine artificial intelligence will add $15.7 trillion to the worldwide economy come 2030.
While most institutional money managers and Wall Street analysts view AI and the companies deploying AI infrastructure and software favorably, this bullishness isn’t universal. Based on the low-water price targets issued by a select group of Wall Street analysts, the subsequent five AI stocks could plunge by as much as 86%!
Nvidia: Implied downside of 30%
The first AI stock which may tumble after a monstrous run higher is none except for the infrastructure backbone of the AI revolution, Nvidia (NASDAQ: NVDA). In February, D.A. Davidson analyst Gil Luria raised his and his firms’ price goal on Nvidia to $620 from $410. Despite this epic increase, it implies that the third-largest public company by market cap inside the U.S. will shed 30% of its value, based on where it closed on April 5.
Although Nvidia’s A100 and H100 graphics processing units (GPUs) have been the overwhelming top alternative of corporations for AI-accelerated data centers, there are various reasons to be imagine Nvidia stock may be in a bubble.
To begin out with, Nvidia’s top 4 customers, which comprise about 40% of its sales, are all developing AI GPUs of their very own. Even when these firms proceed to rely on Nvidia’s GPUs as complements to their in-house GPUs, future orders from these industry leaders will be expected to say no.
In order so as to add to the above, Nvidia’s pricing power on its A100 and H100 GPUs is anticipated to take successful inside the latter-half of 2024. The lion’s share of its 217% increase in data center sales in fiscal 2024 (ended Jan. 28, 2024) was driven by GPU scarcity. As latest competitors enter the world and Nvidia ramps up its own production, GPU scarcity will diminish — as will the company’s pricing power.
Further, every next-big-thing trend throughout the last 30 years has navigated its way through an early stage bubble. Suffice it to say, I fully expect Luria’s price goal to be hit.
Super Micro Computer: Implied downside of 74%
A second artificial intelligence stock which may plummet inside the not-too-distant future if one Wall Street analyst is correct is server and storage solutions company Super Micro Computer (NASDAQ: SMCI). Senior equity research analyst Mehdi Hosseini of Susquehanna stood firm on his price goal of $250 for Super Micro just two months earlier in an interview on CNBC. This may increasingly imply Super Micro Computer losing almost three-quarters of its current value.
It’s comprehensible why investors have gone head over heels for Super Micro. The company incorporates Nvidia’s top-tier GPUs in its energy-efficient and highly customizable rack servers which may be utilized in AI-accelerated data centers. Sales for the company are expected to double in 2024 to north of $14 billion.
Nevertheless, we have now been here before with Super Micro. It was expected to be a foremost beneficiary of the cloud-computing revolution inside the late 2010s, but did not handle its sales momentum. This speaks to the indisputable undeniable fact that investors have a terrible habit of overestimating the adoption of recent trends and innovations.
Super Micro Computer also finds itself on the mercy of Nvidia. If the latter continues to handle supply issues/scarcity for its GPUs, Super Micro will fail to understand its full potential.
While a retracement to $250 won’t be inside the cards anytime soon, Super Micro Computer definitely has loads to prove after its stock appreciated by 767% over the trailing 12 months.
Tesla: Implied downside of 86%
The potential disaster du jour amongst AI stocks is North America’s leading electric-vehicle (EV) manufacturer Tesla (NASDAQ: TSLA). CEO and founder Gordon Johnson of GLJ Research believes Tesla will retrace to $23.53 per share, which could represent 86% downside from where it closed on April 5.
On one hand, Tesla has made history by becoming the first automotive company to construct itself from the underside as much as mass production in well over a half-century. It is usually the one EV pure-play that’s generating a recurring profit (4 consecutive years, as of the tip of 2023).
On the an identical time, Tesla is encountering game-changing challenges as EV demand tapers off. The company slashed the sales price of its 4 production models (3, S, X, and Y) on greater than a half-dozen occasions in 2023. The has been a more-than-halving in Tesla’s operating margin because the top of September 2022 (17.2% to eight.2%, as of Dec. 31, 2023).
Perhaps a superb greater issue is that Tesla has didn’t turn into greater than only a automotive company. Its Energy Generation and Storage segment sales have stagnated in recent quarters, while Services is generating a low-single-digit gross margin. I’ll add that solar has been a money-loser since SolarCity was acquired in 2016.
Despite being nothing greater than a automotive company, Tesla is valued at nearly 60 times forecast earnings in 2024. With most auto stocks trading in quite a lot of 6 to eight times expected earnings per share (EPS), there’s definite reason to assume Tesla stock will head lower.
MicroStrategy: Implied downside of 85%
A fourth artificial intelligence stock which may get absolutely crushed if the most-bearish Wall Street analyst proves accurate is enterprise analytics software company MicroStrategy (NASDAQ: MSTR). Last August, Jefferies analyst Brent Thill defended his firms’ lowball price goal of $210 for MicroStrategy, which could imply a decline of 85% from where shares closed this past week.
One issue for MicroStrategy is that its AI-driven enterprise analytics software division stopped growing 10 years ago. Sales have fallen by an aggregate of 14% since peaking.
But let’s face the facts: MicroStrategy is best-known for CEO Michael Saylor’s strategy of issuing convertible debt and using the proceeds to buy Bitcoin (CRYPTO: BTC), the most important cryptocurrency by market cap. On March 19, Saylor made a post on X (the platform formerly generally often called Twitter) that noted his company held 214,246 Bitcoin — greater than 1% of the eventual supply — at a median price of roughly $35,160 per token.
With each Bitcoin valued at $67,600, as of the time of this writing, MicroStrategy’s crypto stake is value $14.5 billion. Nevertheless, the company’s market cap currently stands at $24.4 billion. Accounting for the company’s modestly profitable (but non-growing) software business, along with its growing debt pile, MicroStrategy is trading at around a 70% premium to the Bitcoin it holds.
If investors have to buy Bitcoin, a spot Bitcoin exchange-traded fund (ETF) or a direct purchase of the cryptocurrency on an exchange could be a considerably smarter move than buying into MicroStrategy, whose premium valuation to the current price of Bitcoin is unnecessary.
Palantir Technologies: Implied downside of 78%
The fifth AI stock which may plunge, in step with the prognostication of 1 Wall Street analyst, is data-mining company Palantir Technologies (NYSE: PLTR). Analyst Rishi Jaluria of RBC Capital doesn’t imagine Palantir’s Business segment margins can proceed expanding at their current pace. This compelled Jaluria to recently reiterate his and his firms’ $5 price goal on Palantir, which implies 78% downside.
There isn’t any query Palantir’s stock is dear. The company’s nearly $51 billion market cap is closing in on a multiple of 19 times forecast sales this 12 months. It is usually valued at 70 times consensus EPS in 2024 despite slowing sales growth.
But one thing Palantir has working for it that merits a hefty premium is its irreplaceability. No company at scale comes anywhere near the solutions it could possibly provide. Palantir’s AI-driven Gotham platform helps governments cull data and plan military operations. The contracts Palantir wins from the U.S. government are more likely to span multiple years and generate highly predictable money flow.
Meanwhile, its Foundry platform is just getting off the underside and helping businesses make sense of their data so that they will streamline their operations. Whereas a sales ceiling exists with Gotham — i.e., Palantir won’t offer access to its platform to certain countries (e.g., China) — Foundry has a theoretical growth runway that stretches an extended time into the long term.
Though it could take some time for Palantir to grow into its current valuation, I don’t anticipate Jaluria’s low-water price goal being hit.
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Sean Williams has no position in any of the stocks mentioned. The Motley Idiot has positions in and recommends Bitcoin, Jefferies Financial Group, Nvidia, Palantir Technologies, and Tesla. The Motley Idiot has a disclosure policy.
5 Artificial Intelligence (AI) Stocks That Can Plunge As much as 86%, Based on Select Wall Street Analysts was originally published by The Motley Idiot