For almost two years, artificial intelligence (AI) has dominated the discussion on Wall Street – and for good reason.
The ability of AI-powered software and systems to learn and evolve over time without human intervention makes this technology useful in most sectors and industries around the world. The rise of AI is why PwC analysts predict a $15.7 trillion boost to the global economy by 2030.
However, previous next-big-thing innovations have consistently shown that not all participants will be winners, or at least keep their parabolic moves higher. While artificial intelligence has been a boon for some tech-driven companies, three AI-dependent high flyers could plummet as much as 78%, based on the price targets of select Wall Street analysts.
Nvidia: implicit disadvantage of 28%
The first leading AI stock to go parabolic but could soon face a substantial downside, at least according to one Wall Street analyst’s prediction, is the semiconductor giant. Nvidia (NASDAQ: NVDA). Analyst Gil Luria of DA Davidson expects Nvidia shares to reach $90, which would mark a 28% decline from the near $125 they closed at on Oct. 4.
Nvidia’s parabolic gains reflect that Nvidia is the face of the AI revolution. The H100 graphics processing unit (GPU) has essentially become the brains for high-compute data centers that need to make split-second decisions, run generative AI solutions, and train large language models.
Nvidia also benefits from exceptionally strong pricing power for its H100, which has commanded a 100% to 300% price premium over competing AI GPUs. Furthermore, CEO Jensen Huang noted last week that demand for the successor to the Blackwell chip, which is faster and more energy efficient than its predecessor, is “insane.”
Despite being at the forefront of innovation for Wall Street’s hottest trend, headwinds are emerging for this AI darling.
Nvidia, for example, faces competition from all sides. Cheaper and more available AI GPUs are logically expected to chip away at their monopoly-like market share in AI-accelerated data centers in the coming quarters. Perhaps more importantly, Nvidia’s four largest customers by net revenue (all members of the “Magnificent Seven”) are developing AI GPUs in-house for their data centers. This indicates a reduced dependence on Nvidia’s hardware in the future.
Company insiders have also given investors little reason to cheer. Jensen Huang was a persistent seller of his company’s stock during a three-month period between mid-June and mid-September. Meanwhile, no insider has purchased Nvidia shares on the open market since December 2020. It sends a pretty clear signal that the company’s stock is not a good value.
Finally, there has been no breakthrough innovation or technology in thirty years that has avoided an early-stage bubble. Investors consistently overestimate how quickly a new technology will become mainstream, and we appear to be witnessing the same story playing out with artificial intelligence. If history is correct and the AI bubble bursts, Nvidia would likely be hit harder than any other leading AI stock.
Upstart Holdings: implied 76% disadvantage
A second artificial intelligence stock that has made a few parabolic moves since the start of this decade, but could see a significant decline in the not-too-distant future based on a Wall Street analyst’s forecast, is a cloud-based credit platform. Start-up holding companies (NASDAQ: UPST). Wedbush analyst David Chiaverini sees Upstart stock retreating to $10 per share, which would represent a 76% decline from where it ended on Oct. 4.
On paper, Upstart is an exciting business model. Instead of the traditional loan review process taking weeks and costing credit institutions time and money, Upstart’s platform was able to fully automate 91% of loan applicants in the second quarter. The company’s approval process relies on AI and machine learning to assess risk and approve/deny loans.
Upstart also partners with more than 100 banks and credit unions. The AI-driven lending model leads to more approvals and an expansion of the customer pool for financial institutions, without negatively impacting their payment delinquencies and charge-off rates.
However, Upstart’s model is highly dependent on favorable interest rates. The Federal Reserve’s strongest rate hike cycle in four decades, which began in March 2022, reduced demand for personal, auto and home loans. Even with the country’s central bank starting an interest rate easing cycle in September, interest rates will likely have to fall much further before credit activity will really pick up.
Upstart’s business model is also untried, which could give Wall Street and investors some breathing space. When interest rates were near historic lows earlier this decade, Upstart’s model grew rapidly and the company was profitable on a recurring basis. The country is now losing money every quarter and its growth engine has come to a complete standstill.
It’s also unclear how Upstart would fare if a recession were to hit the US. A number of predictive indicators, such as a historic decline in the US M2 money supply and the longest yield curve inversion on record, suggest that economic weakness is a real possibility. Lending is highly cyclical, and Upstart is still trying to find its footing after the fastest interest rate rise cycle since the early 1980s.
Palantir Technologies: implicit disadvantage of 78%
The third AI stock that went parabolic but may tumble back down, based on a Wall Street analyst’s estimate, is a data mining specialist Palantir Technologies (NYSE:PLTR). RBC Capital’s Rishi Jaluria maintains a $9 price target on Palantir, which if accurate would imply a 78% downside!
Palantir’s monstrous run reflects Palantir’s unique business model. The company’s Gotham platform, which focuses on select federal governments, relies on AI and machine learning to help with data collection/aggregation and mission planning, among other things. Gotham has been the main source of growth for Palantir in recent years, with many of its largest contracts spread over four or five years.
However, the company’s future largely depends on the relatively young Foundry platform. Foundry also integrates AI solutions and aims to help companies streamline their operations by better understanding their data.
While Palantir’s irreplaceability and continued double-digit growth rate are worth some valuation premium, there are reasons to believe the stock has reached a plateau.
For example, Palantir’s Gotham platform is only available to select countries that are allies of the United States. This means that, for example, the company’s management would not grant China access to Gotham. Despite the fact that Gotham generates consistent revenue growth, this does place a glass ceiling over this operating segment.
Palantir’s valuation isn’t exactly palatable either. Shares closed the week before at an estimated 93 times next year’s earnings and 27 times expected revenue. These are nosebleed multiples that require flawless execution, something rarely seen over extended periods of time on Wall Street.
While Jaluria’s $9 price target seems overly pessimistic, the optimists have likely moved in the positive direction as well.
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Sean Williams has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Nvidia, Palantir Technologies, and Upstart. The Motley Fool has a disclosure policy.
3 Artificial Intelligence (AI) stocks that have gone parabolic could plummet as much as 78%, according to Select Wall Street analysts. originally published by The Motley Fool
