Unveiling the Underbelly of Prominent AI Stocks Unveiling the Underbelly of Prominent AI Stocks

Written By Michael Gary Scott

Throughout history, investors have eagerly awaited the advent of groundbreaking innovations that could propel businesses to new heights akin to the internet’s transformative power. The emergence of artificial intelligence (AI) promises to be that game-changer.

AI encompasses software and systems capable of performing human-like tasks autonomously. The allure lies in its potential to evolve independently, augmenting efficiency and adapting to new tasks, thereby revolutionizing various sectors of the US and global economies.

A professional money manager utilizing a calculator and stylus to analyze a stock chart on a computer monitor.

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The potential magnitude of the impending AI transformation is left to speculation and imagination. PwC analysts have projected that by 2030, AI could inject a staggering $15.7 trillion into the global economy, with $6.6 trillion attributed to enhanced productivity and $9.1 trillion to consumption-side benefits.

Such astronomical figures have not gone unnoticed by Wall Street’s financial wizards. Most institutions and analysts have set ambitious growth projections and soaring price targets for leading AI stocks, painting a rosy picture of future prospects.

However, amid the optimism, a stark contrast emerges.

Based on conservative estimates from select Wall Street analysts, three prominent AI stocks stand to plunge by a substantial 91%.

The Palantir Predicament: Potential 65% Downswing

Flagging as a potential candidate for a severe downturn, data-mining maven Palantir Technologies (NYSE: PLTR) faces a looming 65% drop, as per prognostications by RBC Capital’s Rishi Jaluria.

While one analyst envisions a 35% upside from its July 3 close, Rishi Jaluria’s forecast of $9 per share rings alarm bells. Should this prediction materialize, one of the AI sector’s hottest players could see a catastrophic 65% plunge.

Palantir’s operational performance has received accolades, yet concerns linger, especially surrounding its commercial segment. Notably, revenue inflows from special purpose acquisition companies (SPACs) have raised sustainability doubts.

Despite legit apprehensions, Palantir boasts distinctive competitive advantages that merit premium valuation. Its Gotham platform, catering to governmental data management, has been the cornerstone of its double-digit growth trajectory and cash flow stability.

The company’s potential hinges on the success of its Foundry platform for commercial clients. Though its customer base has surged by 53%, Foundry’s growth trajectory is nascent, inviting uncertainties.

Nvidia’s Nemesis: Potential 22% Decline

Nvidia (NASDAQ: NVDA), the semiconductor colossus riding the AI boom, faces a looming 22% downfall, courtesy of Deutsche Bank’s Ross Seymour’s $100 price target (adjusted post a 10-for-1 stock split).

Renowned for its AI-accelerated data center GPUs, Nvidia has dominated the market, with its H100 GPU becoming the go-to chip. A TechInsights report from last year revealed that Nvidia’s GPUs comprised 98% of the 3.85 million AI-GPUs shipped.

An engineer inspecting wires and switches on a data center server tower.

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Decoding the Dynamics in the World of Technology Giants

Decoding the Dynamics in the World of Technology Giants

As architecture gears up to debut in the latter half of the year, Nvidia is seemingly poised to maintain its compute advantage in enterprise data centers without breaking a sweat. The road ahead, however, may prove to be paved with challenges, as history tends to play the devil’s advocate with businesses leading the charge in the next big thing.

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Nvidia: Navigating Competitive Waters

Nvidia’s forecast of a fiscal second-quarter adjusted gross margin at 75.5% (+/- 50 basis points) raises a cautionary flag. While this figure remains notably above historical averages, the looming decline from the preceding quarter suggests an encroachment of competitive pressures.

Rival players are gearing up to release or upscale production of their AI-GPUs in the latter part of the year, while Nvidia’s top customers are not far behind, foraying into developing AI-accelerating chips for their own data centers. The potential easing of GPU scarcity, which fueled Nvidia’s impressive adjusted gross margin, signals possible turbulence on the investor front.

Tesla: Navigating Troubled Waters

One of the focal points of concern among AI stocks right now is Tesla, the world’s most valuable electric-vehicle (EV) manufacturer. The company’s full self-driving (FSD) software, utilizing a network of cameras and ultrasonic sensors, epitomizes Tesla’s integration of AI into its EV ecosystem.

In a recent move, long-time Tesla skeptic Gordon Johnson of GLJ Research slashed his target price on Tesla. While acknowledging Tesla’s groundbreaking achievements in the auto industry, such as achieving GAAP profit for four consecutive years, concerns loom large.

Over the past 18 months, Tesla’s pricing for its EV fleet has seen numerous cuts, reflecting a necessity to enhance price competitiveness amid increasing competition. The consequence – a sharp dip in the company’s operating margin, a return to free cash outflow, and a surge in EV inventory.

Despite efforts to diversify beyond an auto company, Tesla’s ventures outside the EV sphere have struggled to gain traction. Revenue from the Energy Generation and Storage segment has witnessed a notable slowdown, while Services’ gross margin lingers in the low single digits. Tesla, a poster child for the electric future, grapples with contracting margins and dwindling EV deliveries.

Adding to the bleak outlook are Musk’s unmet promises and innovations, particularly surrounding Level 5 autonomy for Tesla’s EVs and the underwhelming performance of the Cybertruck. Tesla finds itself in a precarious position—a car company with shrinking margins and a premium valuation amidst a sea of challenges.

The Palantir Question

As investors contemplate the tech landscape, a critical question emerges: should one consider investing $1,000 in Palantir Technologies? The illustrious Motley Fool Stock Advisor team recently excluded Palantir Technologies from its list of top 10 stocks, touting potential colossal returns from other stocks on the list.

Noteworthy is the remarkable success story of Nvidia when it made the list back in April 2005. A $1,000 investment at that time would have burgeoned to a staggering $786,046 today. The Stock Advisor service, considered a beacon of investment wisdom, has significantly outperformed the S&P 500 since its inception in 2002.

Amidst the evolving tech landscape, the narrative surrounding Palantir Technologies and its investment prospects beckons a deeper exploration.