Wall Street Thinks These High-Flying Artificial Intelligence (AI) Stocks Are Headed Lower (Hint: Nvidia Isn't 1 of Them)
Wall Street Thinks These High-Flying Artificial Intelligence (AI) Stocks Are Headed Lower (Hint: Nvidia Isn't 1 of Them)
What's the modern-day equivalent to King Midas turning everything he touched to gold? Artificial intelligence (AI) is a top candidate. Many AI stocks have delivered sizzling gains over the past 18 months. Nvidia (NASDAQ: NVDA) is the most famous example, with the demand for its AI chips helping push the company's market cap above $3 trillion.
But all good things eventually come to an end. Although analysts still think Nvidia has some room to run, they're not as optimistic about every AI stock. Here are three high-flying AI stocks Wall Street thinks are headed lower.
1. Arm Holdings
Shares of Arm Holdings (NASDAQ: ARM) have skyrocketed more than 120% year to date. That gain isn't as great as Nvidia's, but it's in the same ballpark.
Arm designs semiconductors and software used extensively in central processing units (CPUs). The company's revenue soared 47% year over year in its latest quarter to $928 million -- an all-time high. Over half of this revenue came from royalties paid by customers using its chip architecture.
AI is a key growth driver for Arm. The company thinks the demand for energy-efficient AI capabilities in data centers and edge devices will lead to higher sales for its technology. It's especially upbeat about the prospects for Nvidia's Grace Blackwell Superchip which uses Nvidia's Blackwell graphics processing unit (GPU) architecture combined with Arm's Grace CPU.
However, Wall Street isn't bullish 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 Arm's share price could sink 65%.
2. Palantir
Palantir Technologies (NYSE: PLTR) is another big AI winner. Shares of the data analytics software developer are up nearly 50% in 2024 thanks mainly to a big jump in February.
The company's flagship product is its Artificial Intelligence Platform (AIP). Palantir's revenue jumped 21% year over year in the first quarter of 2024 to $634 million, fueled largely by AIP's momentum.
Ryan Taylor, Palantir's Chief Revenue Officer and Chief Legal Officer, said in the company's Q1 earnings call that "AIP's applications seem endless." He stated, "We've shared our plans to capture the market with AIP. And our results show that our strategy is not only succeeding, it is accelerating."
Despite the prospects for AIP, analysts think Palantir's momentum will soon screech to a halt. The average 12-month price target for the stock is roughly 15% below the current share price.
3. Arista Networks
Arista Networks (NYSE: ANET) has taken investors on a roller-coaster rise this year. However, the ride has been fun overall for investors, with Arista's shares soaring 50%.
The company provides cloud networking technology. AI has served as a significant tailwind as organizations migrate rapidly to the cloud to train and deploy large language models (LLMs). Arista has been a direct beneficiary of the trend, with its revenue jumping more than 16% year over year in Q1 to $1.57 billion.
Arista CEO Jayshree Ullal thinks more growth is on the way. She estimates the total addressable market in client-to-cloud AI networking is at least $60 billion. And she views this market as Arista's to win.
Wall Street isn't overly pessimistic about Arista, but it's not optimistic either. The average 12-month price target for the stock is around 6% lower than the current share price.
Is Wall Street right about these AI stocks?
Maybe analysts' price targets for Arm, Palantir, and Arista will prove prescient; maybe they won't. No one knows for sure how any stock will perform over the next 12 months.
I will note, though, that the growth prospects for all three AI stocks seem to be largely baked into their share prices already. The price-to-earnings-to-growth (PEG) ratios for Arm, Palantir, and Arista based on five-year growth projections are close to or above 2.0.
My view is that these stocks are likely to continue winning over the long term. However, I wouldn't be surprised if any or all of them pull back somewhat over the next 12 months.
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Keith Speights has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Arista Networks, Nvidia, and Palantir Technologies. The Motley Fool has a disclosure policy.