What’s the modern equivalent of King Midas turning everything he touched into gold? Artificial intelligence (AI) is a top contender. Many AI stocks have delivered huge gains over the past 18 months. Nvidia (NASDAQ: NVDA) is the best-known example: demand for AI chips pushed the company’s market capitalization above $3 trillion.
But all good things must come to an end. While analysts still think Nvidia has some room to run, they’re not as bullish on every AI stock. Here are three high-flying AI stocks that Wall Street thinks are headed lower.
1. Arm Holdings
Shares of Arm Holdings (NASDAQ: ARM) are up more than 120% year to date. That profit is not as large as that of Nvidia, but is in the same margin.
Arm designs semiconductors and software that are widely used in central processing units (CPUs). The company’s revenue rose 47% year-over-year to $928 million in the latest quarter – an all-time high. More than half of this revenue came from royalties paid by customers using the chip architecture.
AI is a key growth driver for Arm. The company believes demand for low-power AI capabilities in data centers and edge devices will lead to higher sales for its technology. It’s especially optimistic about the prospects for Nvidia’s Grace Blackwell Superchip, which uses Nvidia’s Blackwell graphics processing unit (GPU) architecture in combination with Arm’s Grace CPU.
Wall Street, however, is not optimistic about Arm’s near-term prospects. The average 12-month price target for the stock is 29% below the current share price. The most pessimistic analyst predicts that Arm’s share price could fall by 65%.
2. Palantir
Palantir Technologies (NYSE: PLTR) is another big AI winner. Shares of the data analytics software developer have risen nearly 50% in 2024, thanks largely to a big jump in February.
The company’s flagship is the Artificial Intelligence Platform (AIP). Palantir’s revenue rose 21% year over year to $634 million in the first quarter of 2024, largely fueled by AIP’s momentum.
Ryan Taylor, Palantir’s chief revenue officer and chief legal officer, said in the company’s Q1 earnings call that “the applications of AIP seem endless.” He stated: “We have shared our plans to conquer the market with AIP. And our results show that our strategy is not only successful, but also accelerating.”
Despite AIP’s outlook, analysts believe Palantir’s momentum will soon come to a halt. The average 12-month price target for the stock is about 15% below the current share price.
3. Arista Networks
Arista Networks (NYSE: ANET) has sent investors on a rollercoaster ride this year. Overall, though, the ride has been fun for investors, with Arista shares rising 50%.
The company provides cloud networking technology. AI has served as a significant tailwind as organizations rapidly migrate to the cloud to train and deploy large language models (LLMs). Arista has benefited immediately from the trend, with revenue in Q1 increasing more than 16% year-over-year to $1.57 billion.
Arista CEO Jayshree Ullal thinks more growth is on the way. She estimates that the total addressable market in client-to-cloud AI networks is at least $60 billion. And she sees this market as one that Arista can win.
Wall Street isn’t overly pessimistic about Arista, but it’s not optimistic either. The average twelve-month price target for the stock is approximately 6% lower than the current share price.
Is Wall Street Right About These AI Stocks?
Perhaps analysts’ price targets for Arm, Palantir and Arista will prove prescient; maybe not. No one knows for sure how a stock will perform over the next twelve months.
I would note, however, that the growth prospects for all three AI stocks already appear to be largely baked into their share prices. The price-to-earnings-growth (PEG) ratios for Arm, Palantir and Arista are close to or above 2.0 based on five-year growth projections.
I think these stocks are likely to continue to gain over the long term. However, I wouldn’t be surprised if one or all of them pull back a bit over the next 12 months.
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Keith Speights has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Arista Networks, Nvidia, and Palantir Technologies. The Motley Fool has a disclosure policy.
Wall Street Thinks These High-Flying Artificial Intelligence (AI) Stocks Will Fall (Hint: Nvidia Isn’t One of Them) was originally published by The Motley Fool
